The critical role played by intermediaries in the operation of financial markets is well known. Because entrepreneurs often lack sufficient savings to finance their ventures on their own and people with savings often do not have projects that will put their funds to profitable use, there are significant benefits to be derived from trades in which savers transfer funds to entrepreneurs in return for income in the form of interest or dividend payments. The problem, however, is that high transaction costs may prevent such mutually advantageous exchanges from occurring. Because it is costly for savers to assess the prospects of each entrepreneurial project, or conversely for entrepreneurs to convince savers individually of the merits of their ventures, many good (if risky) projects may be starved for support, while savings get channeled to more conventional, easier to evaluate, investments. Intermediaries can significantly reduce this problem by mobilizing and pooling resources from savers and investigating the creditworthiness of alternative investment opportunities on their behalf. By thus economizing on information costs, intermediaries increase the efficiency with which existing savings are employed to support economic development. Moreover, because their activities raise the return to saving in the economy as a whole, they also have a positive effect on the pool of available investment funds.

Similar kinds of transaction costs can impede both the generation and exploitation of technological knowledge.