On Capital Market Imperfections as a Source of Low TFP and Economic Rents

Andres Erosa () and Ana Hidalgo

Working Papers from University of Toronto, Department of Economics

Abstract: We propose a theory in which capital market imperfections are at the origin of cross-country TFP differences. In our theory entrepreneurs have private information about the multifactor productivity of their technology. We study how the contracting environment, as described by the ability to enforce contracts, affects the provision of incentives and resource allocation to and across entrepreneurs. Our theory implies that countries with a low ability to enforce contracts use inefficient technologies in equilibrium and are characterized by differences in productivity across industries. These implications of our theory are supported by the empirical evidence. Our theory also suggests that entrepreneurs have a vested interest in maintaining a status quo with low enforcement since it allows them to extract rents from the factor services they hire.

Keywords: Capital market imperfections; Total factor productivity, Relative price distortions; Taxation. (search for similar items in EconPapers)
JEL-codes: O40 O16 J24 D24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dev and nep-dge
Date: 2005-10-11
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