Information accumulation in development

We propose a model in which economic relations and institutions in advanced and less developed countries differ as these societies have access to diff erent amounts of information. The lack of information in less developed eco nomies makes it hard to evaluate the performance of managers and leads to h igh "agency costs." Differences in the amount of information have a variety of sources. As well as factors related to the informational infrastructure , we emphasize that societies accumulate information by repeating certain t asks. Poor societies may therefore have less information partly because the scarcity of capital restricts the repetition of various activities. Two im plications of our model are (1) as an economy develops and generates more i nformation, it achieves better risk sharing at a given level of effort, but because agents are exerting more effort and the types of activities are ch anging, the overall level of risk sharing may decline; (2) with development , the share of financial intermediation carried out through market institut ions should increase.