A general equilibrium model based on the parable of an economy of many islands shows the market imperfections in the intermediation activity affect economic growth and possibly prevent take off into sustained growth. The inhabitants of different islands accumulate heterogeneous assets and transportation-type intermediation allows for better allocation of the productive resources. The development process is accompanied by a reduction in intermediation costs, which induces firms to adopt more efficient techniques and sustains economic growth. A laissez-faire economy suffers from two distortions: the existence of market imperfections and a 'thick market' externality.

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August 1993     Paper Number CEPDP0167