Credit Market Imperfection, Lack of Entrepreneurs and Capital Outflow from a Developing Economy

Sugata Marjit and Suryaprakash Mishra

No 8515, CESifo Working Paper Series from CESifo

Abstract: This paper explores the impact of credit market on the entrepreneurs and demand for credit in a credit constrained economy and the resultant impact on the capital flows. In standard trade models the capital flows across countries are explained as a result of the rate of return differentials due to presence/absence of capital among the countries whereby capital flows from the capital rich countries to capital poor countries. We show that the rate of return differentials could arise due to presence/absence of entrepreneurs, i.e., low price of capital in autarky may reflect lack of demand for credit due to scarcity of entrepreneurs and not capital abundance and eventually may lead to capital outflow from a capital scarce country. This is a different way of echoing the sentiment of the well-known “Lucas Paradox” which suggests that capital might flow from the poor to the rich countries. We also show the possibility of trade and capital flow being complements and not substitutes, as is usual in standard models.

Keywords: credit market imperfection; credit rationing; redistribution; entrepreneurs; capital flows (search for similar items in EconPapers)
JEL-codes: D63 F21 F36 G21 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cfn, nep-ent and nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8515

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