Why Doesn't Technology Flow from Rich to Poor Countries?

88 Pages Posted: 20 Oct 2011 Last revised: 3 Mar 2016

See all articles by Harold L. Cole

Harold L. Cole

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Jeremy Greenwood

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Juan M. Sánchez

Federal Reserve Banks - Federal Reserve Bank of St. Louis; Federal Reserve Banks - Federal Reserve Bank of St. Louis

Multiple version iconThere are 3 versions of this paper

Date Written: March 1, 2016

Abstract

What is the role of a country's financial system in determining technology adoption? To examine this, a dynamic contract model is embedded into a general equilibrium setting with competitive intermediation. The terms of finance are dictated by an intermediary's ability to monitor and control a firm's cash flow, in conjunction with the structure of the technology that the firm adopts. It is not always profitable to finance promising technologies. A quantitative illustration is presented where financial frictions induce entrepreneurs in India and Mexico to adopt less-promising ventures than in the United States, despite lower input prices.

Keywords: Costly cash-flow control; costly state verification; dynamic contract theory; economic development; establishment-size distributions; finance and development; financial intermediation; India, Mexico, and the United States; long- and short-term contracts; monitoring; productivity; retained earnings

JEL Classification: D92, E13, G24, O11, O16

Suggested Citation

Cole, Harold L. and Greenwood, Jeremy and Sanchez, Juan M. and Sanchez, Juan M., Why Doesn't Technology Flow from Rich to Poor Countries? (March 1, 2016). Available at SSRN: https://ssrn.com/abstract=1945981 or http://dx.doi.org/10.2139/ssrn.1945981

Harold L. Cole (Contact Author)

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Jeremy Greenwood

University of Pennsylvania - Department of Economics ( email )

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Juan M. Sanchez

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

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Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

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United States

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