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Costly Intermediation And The Poverty Of Nations

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  • Shankha Chakraborty
  • Amartya Lahiri

Abstract

This article has two goals: (i) to reduce the 7-fold productivity differential required to explain the observed 33-fold income difference between the richest and poorest countries of the world; and (ii) to explain cross-country differences in the capital-output ratio. To achieve the first goal we modify the production function of the standard neoclassical growth model to include public capital whose provision is subject to intermediation costs. For the second goal we distort private investment by introducing credit frictions. The model, quantified using cross-country data, generates an income gap of 33 with productivity differences of "only" 3 under the measured variations in public and private capital. The required productivity gap declines even further, to 2.1, when we introduce a home-production sector. On the second goal, however, credit frictions do a poor job of explaining cross-country variations in the capital-output ratio. Copyright 2007 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 48 (2007)
Issue (Month): 1 (02)
Pages: 155-183

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Handle: RePEc:ier:iecrev:v:48:y:2007:i:1:p:155-183

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Cited by:
  1. Jeremy Greenwood & Juan M. Sánchez & Cheng Wang, 2010. "Financing development: the role of information costs," Working Papers, Federal Reserve Bank of St. Louis 2010-024, Federal Reserve Bank of St. Louis.
  2. Hung-ju Chen & Hsiao-tang Hsu, 2005. "The Role Of Firm Size In Controlling Output Decline During The Asian Financial Crisis," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, Chung-Ang Unviersity, Department of Economics, vol. 30(2), pages 103-129, December.

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