Finance, Technology and Inequality in Economic Development

Osaka University, Graduate School of Economics and OSIPP Working Paper No. 05-08

41 Pages Posted: 21 Apr 2005

See all articles by Ryo Horii

Ryo Horii

Osaka University - Institute of Social and Economic Research

Ryoji Ohdoi

Osaka City University - Graduate School of Economics

Kazuhiro Yamamoto

Osaka University - Graduate School of Economics

Date Written: August 2005

Abstract

This paper presents an overlapping generations model with technology choice and credit market imperfections, in order to investigate a possible source of underdevelopment. The model shows that a better financial infrastructure that provides stronger enforcement of contracts facilitates the development of financial markets, which, in turn, enables firms to switch to more productive and 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 infrastructure to the level at which the technological switch occurs, resulting in a development trap. A remedy is to facilitate small firms' adoption of the currently used technology rather than the new one.

Keywords: Enforcement; Technological Switch; Income Distribution; Credit Rationing; Institutions.

JEL Classification: O14, O16

Suggested Citation

Horii, Ryo and Ohdoi, Ryoji and Yamamoto, Kazuhiro, Finance, Technology and Inequality in Economic Development (August 2005). Osaka University, Graduate School of Economics and OSIPP Working Paper No. 05-08. Available at SSRN: https://ssrn.com/abstract=702884 or http://dx.doi.org/10.2139/ssrn.702884

Ryo Horii (Contact Author)

Osaka University - Institute of Social and Economic Research ( email )

1-1 Yamadaoka
Suita, Osaka 565-0871
Japan
+81 6 6879 8552 (Phone)
+81 6 6879 8583 (Fax)

HOME PAGE: http://econ.jpn.org/horii/

Ryoji Ohdoi

Osaka City University - Graduate School of Economics ( email )

3-3-138 Sugimoto,
Sumiyoshi-ku,
Osaka, 558-8585
Japan
+81-6-6605-2270 (Phone)

Kazuhiro Yamamoto

Osaka University - Graduate School of Economics ( email )

1-7 Machikaneyama
Toyonaka, Osaka, 560-0043
Japan

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