Why Don't Poor Countries Adopt Better Technologies?
AbstractIn this paper we develop a simple heterogeneous-agent model with incomplete markets to explain the prevalence of a large low-productivity, informal sector in developing countries. In our model, the provision of public infrastructure creates a productivity premium for formalization, which increases with infrastructure quality. Our model breaks the symmetry of equilibria and offers endogenous differentiation of rich and poor countries' behavior. While the model supports multiple stable equilibria in `rich' countries with varying degrees of formalization, including full formalization, it indicates an absence of equilibrium with full formalization in `poorer' countries. If legislative intolerance alone suffices to jolt a rich country into the equilibrium with complete formalization, accompanying policies may be required in poor countries to first provide the conditions for existence of such equilibrium.
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Bibliographic InfoPaper provided by Université du Québec à Montréal, Département des sciences économiques in its series Cahiers de recherche du Département des sciences économiques, UQAM with number 20-07.
Date of creation: Mar 2001
Date of revision:
Publication status: forthcoming (revised version) in Journal of Development Economics, under the title `Taxes, Inequality and the Size of the Informal Sector'
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More information through EDIRC
Technology adoption; informal sector; industrialization; inequality; infrastructure;
Find related papers by JEL classification:
- O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
- O14 - Economic Development, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
- H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-03-13 (All new papers)
- NEP-DEV-2001-03-13 (Development)
- NEP-DGE-2001-03-13 (Dynamic General Equilibrium)
- NEP-TID-2001-03-13 (Technology & Industrial Dynamics)
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