Feyen, Erikde la Torre, AugustoIze, Alain2012-03-192012-03-192011-10-01https://hdl.handle.net/10986/3620This paper analyzes the bright and dark sides of the financial development process through the lenses of the four fundamental frictions to which agents are exposed -- information asymmetry, enforcement, collective action, and collective cognition. Financial development is shaped by the efforts of market participants to grind down or circumvent these frictions, a process further spurred by financial innovation and scale and network effects. The analysis leads to broad predictions regarding the sequencing and convexity of the dynamic paths for a battery of financial development indicators. The method used also yields a robust way to benchmark the financial development paths followed by individual countries or regions. The paper explores the reasons for path deviations and gaps relative to the benchmark. Demand-related effects (past output growth), financial crashes, and supply-related effects (the quality of the enabling environment) all play an important role. Informational frictions are easier to overcome than contractual frictions, not least because of the transferability of financial innovation across borders.CC BY 3.0 IGOACCOUNTINGADVERSE SELECTIONARBITRAGEASSET MANAGERSASSETS RATIOASYMMETRIC INFORMATIONBANK ASSETSBANK BRANCHBANK CREDITBANK DEBTBANK DEPOSITBANK DEPOSITSBANK MARGINSBANK POLICYBENCHMARKBENCHMARKINGBENCHMARKSBILLS OF EXCHANGEBORROWERBOUNDED RATIONALITYBROKERSCAPITAL ADEQUACYCAPITAL MARKETSCAPITALIZATIONCENTRAL BANKCENTRAL BANKSCHECKING ACCOUNTSCOLLECTIVE ACTIONCOMMERCIAL BANKSCONSUMERSCONTRACT ENFORCEMENTCOORDINATION FAILURESCORPORATE BONDSCORPORATE GOVERNANCECREDIT BUREAUSCREDIT CARDCREDIT DEFAULTCREDIT DEFAULT SWAPSCREDIT GROWTHCREDIT INFORMATIONCREDIT MARKETSCREDITORCREDITOR RIGHTSCURRENCY MISMATCHESCUSTODYDEBT SECURITIESDEFAULT RISKDEPOSITDEPOSIT SERVICESDEPOSITSDEREGULATIONDERIVATIVEDERIVATIVE MARKETSDERIVATIVE PRODUCTSDERIVATIVESDEVELOPING COUNTRIESDEVELOPMENT PATHSDEVELOPMENT POLICIESDEVELOPMENT POLICYDISCLOSURE STANDARDSDISEQUILIBRIUMDIVERSIFICATION BENEFITSDOMESTIC CURRENCYDOMESTIC DEBTDOMESTIC EQUITIESDOMESTIC EQUITYECONOMETRIC ANALYSISECONOMIC DEVELOPMENTECONOMIC HISTORYECONOMIC PERFORMANCEECONOMIC POLICIESECONOMIC RENTECONOMIC RESEARCHEMERGING ECONOMIESEMERGING ECONOMYENABLING ENVIRONMENTEQUITY MARKETEQUITY MARKET CAPITALIZATIONEQUITY MARKETSEQUITY SECURITIESEXPECTED VALUESEXPORTEREXPOSUREEXTERNAL DEBTEXTERNAL FINANCEFEE INCOMEFINANCIAL CONTRACTFINANCIAL CONTRACTSFINANCIAL CRISESFINANCIAL CRISISFINANCIAL DEVELOPMENTFINANCIAL FRAGILITYFINANCIAL HISTORYFINANCIAL INFRASTRUCTUREFINANCIAL INNOVATIONFINANCIAL INSTABILITYFINANCIAL INSTITUTIONSFINANCIAL MARKETSFINANCIAL SECTORFINANCIAL SERVICEFINANCIAL SERVICE PROVIDERSFINANCIAL STABILITYFINANCIAL STRUCTUREFINANCIAL SUSTAINABILITYFINANCIAL SYSTEMFINANCIAL SYSTEMSFINANCIAL TRANSACTIONSFINANCIAL VOLATILITYFIXED COSTSFOREIGN CURRENCYFREE RIDING PROBLEMSFUND MANAGERSGDPGDP PER CAPITAGLOBALIZATIONGOVERNMENT BONDGOVERNMENT BOND MARKETGOVERNMENT BORROWINGGOVERNMENT DEBTGOVERNMENT DEBT MARKETSGOVERNMENT GUARANTEESHEDGE FUNDSHEDGESINCOME GROWTHINCOME LEVELINCOME LEVELSINCREASING RETURNSINCREASING RETURNS TO SCALEINFORMATION ASYMMETRYINSTITUTIONAL INVESTORSINSURANCEINSURANCE COMPANIESINSURANCE COMPANYINSURANCE PREMIUMINSURANCE PREMIUMSINTEREST INCOMEINTERNATIONAL BANKINTERNATIONAL FINANCEINVESTINGINVESTMENT BANKSLACK OF COLLATERALLEGAL RIGHTSLIFE INSURANCELIMITED LIABILITYLIQUID ASSETSLIQUIDITYLOANABLE FUNDSMACROECONOMIC POLICYMACROECONOMICSMARGINAL BENEFITSMARGINAL COSTSMARKET ANALYSTSMARKET DEBTMARKET FAILURESMARKET INSTRUMENTSMARKET LIQUIDITYMARKET MECHANISMMARKET PARTICIPANTSMARKET RETURNMARKET SIZEMARKET TURNOVERMARKETABLE ASSETSMIDDLE INCOME COUNTRIESMONETARY POLICYMORAL HAZARDMORTGAGEMUTUAL FUNDMUTUAL FUND ASSETSMUTUAL FUNDSNEGATIVE EXTERNALITIESNETWORK EXTERNALITIESOFFSHORE CENTEROFFSHORE FINANCIAL CENTEROPEN ECONOMIESOUTPUTPAYMENT SERVICESPENSIONPENSION FUNDPENSION FUND ASSETSPENSION FUNDSPENSION REFORMSPER CAPITA INCOMEPOLICY RESPONSEPOLITICAL ECONOMYPORTFOLIOPOSITIVE EXTERNALITIESPRIVATE CREDITPRIVATE DEBTPROPERTY RIGHTSPUBLIC DEBTPUBLIC DEBT SECURITIESPUBLIC GOODREPORESERVERETAIL INVESTORSRETURNSRETURNS TO SCALERISK DIVERSIFICATIONRISK PROFILESRULE OF LAWSCALE EFFECTSSECURITIES MARKETSSOLVENCYSTOCK EXCHANGESSTOCK MARKETSTOCK MARKET CAPITALIZATIONSTOCK MARKETSSTOCK TRADINGSTOCKSTAXTAXATIONTRADINGTRADING PLATFORMTRANSACTIONTRANSACTION COSTSTRANSITION COUNTRYUNDERLYING PROBLEMUSE OF COLLATERALVALUE ADDEDVALUE OF COLLATERALWEALTHWorld Bank10.1596/1813-9450-5854