Response Paper Unit





Thevideo features other than limited commitment, more on alternativeunderpinnings of the different intermediation models. The modelsdiscussed in the video practiced in financial mediation are allgeared towards a creating a better financial playing field for allstakeholders with clear indication of the different consequencesfaced due to the financial decisions made. Growth, TFP, andinternational capital flow is apparently a broad topic that includesdifferent financial concepts ranging from international capital,credit markets, firms, etc. as featured in the video.

Thelesson by the speaker focuses to explain more on TFP, growth, andinternational capital flows. The lesson also explains more onfinancial intermediation and the frictions that are experienced.Specifically, the lesson focuses on different papers written onfinancial development. Different concepts are discussed by the paperranging from firms sizes, financial intermediaries, capital flows,credit market status, entrepreneurship, etc. Finally, finance anddevelopment are discussed herein in terms of limited commitment vs.moral hazard.

Inmy development and knowledge of economics and finance, the topic hashelped me understand more clearly different concepts. Themacroeconomic implication brought about by adverse selection is oneexample. Apparently, I now understand clearly how this leads to anincrease in the equilibrium interest rate all the while boosting theinvestment and equilibrium borrowing. This topic has also helped meunderstand better the theory of firm size. It is worth noting thatfunds in firms will be redirected once the financial sector rises.These funds are redirected from what many would expect to be the maingainers, the poorly performing firms, to the more productive firms.

Thespeaker made some key points on economic development. He noted thatfinancial development has direct causal impact on the development ofa firm. He notes that even though this concept is investigatedquantitatively, inspiration on the research is derived from Townsendand Williamson’s works. Another key point made by the speaker is onthe international capital flows taking place in recent years. Henotes that these capital flows impact on credit markets and createsfinancial frictions. He briefly discusses the different types offrictions. Finally, the speaker makes a third key point noting thatthere is likely to be a variance in the obstacles to trade. Accordingto the speaker, these may vary from region to region. For example, inan urban setting, only certain financial regimes might fit whileothers will thrive well in rural areas.

Itis from the video that I leant about the different financialfrictions that arise from problems caused by limited commitment.Apparently, this explains the income differences that are experiencedacross countries. I learnt that there is a general equilibriumframework that is developed which encompasses different systems offriction. Notably there are two concrete frictions that are at play:moral hazard and limited commitment. It is through this video that Ihave come to learn of another reason why capital deepening occurs.The speaker notes the reason for this reaction as being thenose-diving of the borrowing costs and the dropping of theinterest-rate. Interestingly, this is included in the theory of firmsize. Another fact I learnt from the video is the effect of repayingmore often by the entrepreneurs, the borrowed funds. Interestingly,such entrepreneurs face a larger margin of costs than those whoseldom repay.

Thereare different factors that impact on the domestic and internationalcapital flows. Different frictions as documented in the video are atplay. Having learnt different facts like concepts on firm size, myunderstanding of adverse selection has increased. Clearly, lecture 4is a good source of information on finance and economics.