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Finance, Technology and Inequality in Economic Development

Ryo Horii, Ryoji Ohdoi () and Kazuhiro Yamamoto ()

No 05-08, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: This paper develops an overlapping generations model with technology choice and imperfect credit market, in order to investigate a possible source of underdevelopment. Consistent with empirical observations in the literature, the model shows that better financial institutions that provide stronger enforceability of contracts facilitate the development of financial markets, which in turn enables firms to switch to more capital intensive technologies, thereby promoting economic development. In the presence of credit rationing, however, this technological switch widens inequality. Therefore, risk-averse agents would not be willing to improve the financial institutions to the level at whic the technological switch occurs, resulting in a development trap. A remedy is to facilitate small firms fadoption of existing technology, rather than the newone.

Keywords: Enforceability of Contracts; Technological Switch; Income Distribution, Credit Rationing, Development Trap. (search for similar items in EconPapers)
JEL-codes: O14 O16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev
Date: 2005-04
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Working Paper: Finance, Technology and Inequality in Economic Development (2005) Downloads
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