88 Pages Posted: 20 Oct 2011 Last revised: 3 Mar 2016
Date Written: March 1, 2016
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: Suggested Citation
Cole, Harold L. and Greenwood, Jeremy and Sánchez, 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