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
Date Written: August 2005
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: Suggested Citation