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Finance, Technology and Inequality in Economic Development

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Author Info
Ryo Horii () (Graduate School of Economics, Osaka University)
Ryoji Ohdoi () (Graduate School of Economics, Osaka University)
Kazuhiro Yamamoto () (Graduate School of Economics, Osaka University)

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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 firmsf adoption of the currently used technology rather than the new one.

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Publisher Info
Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 05-08-Rev.

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Length: 43 pages
Date of creation: Apr 2005
Date of revision: Aug 2005
Handle: RePEc:osk:wpaper:0508r

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Related research
Keywords: Enforcement Technological Switch Income Distribution Credit Rationing Development Trap Institutions.

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Find related papers by JEL classification:
O14 - Economic Development, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Radhika Lahiri & Shyama Ratnasiri, 2006. "Concerning Inequality, Technology Adoption, and Structural Change," School of Economics and Finance Discussion Papers and Working Papers Series 207, School of Economics and Finance, Queensland University of Technology. [Downloadable!]
    Other versions:
  2. Kerstin Gerling, 2008. "The Real Consequences of Financial Market Integration when Countries Are Heterogeneous," Working Papers 141, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
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