Essays on credit rationing and endogenous economic growth

The first two chapters of this dissertation examine the credit market when there are information asymmetries. In particular, we examine the adverse selection problem, where banks do not have full information about individual firms applying for a loan. In such a case, it seems intuitive to expect credit rationing results. However, de Meza and Webb (1987) showed that there can be over-investments if we assume firms have different expected returns. In the first chapter, we extend de Meza and Webb\u27s model, and show that the over-investment result depends on the existence of the initial endowment and the absence of collateral, but not on the fixed investment assumption. In the second chapter, we introduce more realistic project technologies. The firm with lower success probability has higher revenue when the project is successful. However, the expected return is assumed to be still higher for the higher success probability firms. This leads to the equilibrium where firms from both the higher and the lower ends of the project spectrum get excluded from the credit market. Consequently, even with an over-investment, importing foreign capital even at seemingly too high a rate can be beneficial. An addition of foreign capital improves the composition of projects undertaken as well as increases the total investment. In the third chapter, we study endogenous economic growth when the fertility rate choice is endogenous. In this model, the aggregate capital stock imposes a positive externality on the economy. Then the growth rates of population, per capita income, consumption, and wage are all determined endogenously at an equilibrium. Consequently, the government can raise social welfare by imposing a tax system that favors capital income over labor income. Such a government policy will increase the rate of economic growth as well as have a positive level effect