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This paper studies the consequences of asymmetric information in the investment sector upon economic growth. In this paper, the information asymmetry generates a moral hazard problem. This moral hazard problem restricts financial arrangements. It is shown that these restrictions make even the long-run competitive equilibrium income dependent upon history. This result also holds in case there is perfect capital mobility. However, when there is capital mobility, the government may be able to intervene in a Pareto improving way. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
Daniel Tsiddon (Fri,) studied this question.