On Capital Market Imperfections as an Origin of Low TFP and Economic Rents

Ana Hidalgo-Cabrillana and Andres Erosa

No 16, 2004 Meeting Papers from Society for Economic Dynamics

Abstract: We propose a theory where 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, thus, resource allocation to and across entrepreneurs. We assume that countries differ in the ability to enforce contracts and show that, in the presence of assymmetric information, countries with low enforcement use inefficient technologies in equilibrium and are characterized by differences in productivity across industries. 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: E44 E62 O1 O49 (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-dev, nep-dge and nep-ent
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Citations: View citations in EconPapers (11)

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