We consider a simple model of international trade under uncertainty, where
production takes time and is subject to uncertainty. The riskiness of production depends
on the choices of the producers, not observable to the general public, and these choices
are influenced by the availability and cost of credit. If investment is financed by a
bond market, then a situation may arise where otherwise identical countries end up
with different levels of interest and different choices of technique, which again implies
differences in achieved level of welfare. Under suitable conditions on the parameters
of the model, the market may not be able to supply credits to one of the countries.
The introduction of financial intermediaries with the ability to control the debtors
may change this situation in a direction which is welfare improving (in a suitable sense)
by increasing expected output in the country with high interest rates, while opening up
for new problems of asymmetric information with respect to the monitoring activity of
the banks.
Keywords: Capital outflow, financial intermediaries, moral hazard
JEL classification: F36, D92, E4