Financial Intermediation and Costly Technology Adoption under Uncertainty: A Political Economy Perspective
AbstractWe develop a stochastic political economy model to explain the trade-off between growth and inequality during the process of technology adoption. In the model endogenous growth occurs through physical and human capital deepening. Agents can adopt either of the two risky high-return technologies, one of which is only available to those who can afford the entry cost associated with financial intermediation. We assume that this entry cost depends on the proportion of government revenue that is allocated towards cost-reducing financial development expenditure, and that agents decide on this proportion through a voting mechanism. The results show that certain interest groups comprising of both the poorest and the richest agents block the policies that are aimed at allocating resources towards costreducing financial development expenditure in the early stages of the economy’s development. However, as redistribution continues from generation to generation, the middle of the distribution successively becomes thicker and consequently the majority of agents start supporting reallocation in the form of cost-reducing financial development expenditure. In the transition to the steady state, inequality patterns show recurring ‘Kuznets-like curves’. Furthermore, high initial inequality tends to hasten the pace at which growth and inequality converge towards the steady state paths, while low inequality result in more fluctuations in transitional growth and inequality. Finally, our results show that although the political outcomes do not coincide with the welfare maximisation outcomes in the early and the transitional stages of the economy, the two outcomes eventually converge in the long-run.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with number 295.
Length: 28 pages
Date of creation: 26 Nov 2012
Date of revision:
political economy; overlapping generations model; growth and inequality; technology adoption; redistribution;
Find related papers by JEL classification:
- O1 - Economic Development, Technological Change, and Growth - - Economic Development
- O3 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-15 (All new papers)
- NEP-DGE-2012-12-15 (Dynamic General Equilibrium)
- NEP-POL-2012-12-15 (Positive Political Economics)
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.:
- Robert J. Barro, 1991.
"Economic Growth in a Cross Section of Countries,"
NBER Working Papers
3120, National Bureau of Economic Research, Inc.
- Barry Bosworth & Susan M. Collins, 2007.
"Accounting for Growth: Comparing China and India,"
NBER Working Papers
12943, National Bureau of Economic Research, Inc.
- Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
- Clarke, George R. G., 1995.
"More evidence on income distribution and growth,"
Journal of Development Economics,
Elsevier, vol. 47(2), pages 403-427, August.
- Persson, T. & Tabellini, G., 1993.
"Is Inequality Harmful for Growth,"
537, Stockholm - International Economic Studies.
- Hongyi Li & Heng-fu Zou, 1998.
"Income Inequality Is Not Harmful for Growth: Theory and Evidence,"
CEMA Working Papers
74, China Economics and Management Academy, Central University of Finance and Economics.
- Li, Hongyi & Zou, Heng-fu, 1998. "Income Inequality Is Not Harmful for Growth: Theory and Evidence," Review of Development Economics, Wiley Blackwell, vol. 2(3), pages 318-34, October.
- Corneo, Giacomo & Gruner, Hans Peter, 2002.
"Individual preferences for political redistribution,"
Journal of Public Economics,
Elsevier, vol. 83(1), pages 83-107, January.
- Corneo, Giacomo & Grüner, Hans Peter, 2001. "Individual Preferences for Political Redistribution," CEPR Discussion Papers 2694, C.E.P.R. Discussion Papers.
- Danny Quah, 1996. "Twin Peaks: Growth and Convergence in Models of Distribution Dynamics," CEP Discussion Papers dp0280, Centre for Economic Performance, LSE.
- Kristin J. Forbes, 2000. "A Reassessment of the Relationship between Inequality and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 869-887, September.
- Alberto Alesina & Dani Rodrik, 1991.
"Distributive Politics and Economic Growth,"
NBER Working Papers
3668, National Bureau of Economic Research, Inc.
- Takahiro Akita, 2003. "Decomposing regional income inequality in China and Indonesia using two-stage nested Theil decomposition method," The Annals of Regional Science, Springer, vol. 37(1), pages 55-77, 02.
- Epple, Dennis & Romano, Richard E., 1996. "Ends against the middle: Determining public service provision when there are private alternatives," Journal of Public Economics, Elsevier, vol. 62(3), pages 297-325, November.
- Dasgupta, Basab & Ajwad, Mohamed Ihsan, 2011. "Income shocks reduce human capital investments : evidence from five east European countries," Policy Research Working Paper Series 5926, The World Bank.
- Parente, Stephen L & Prescott, Edward C, 1994. "Barriers to Technology Adoption and Development," Journal of Political Economy, University of Chicago Press, vol. 102(2), pages 298-321, April.
- Abhijit V. Banerjee & Esther Duflo, 2000.
"Inequality and Growth: What Can the Data Say?,"
NBER Working Papers
7793, National Bureau of Economic Research, Inc.
- Robert M. Townsend & Kenichi Ueda, 2006.
"Financial Deepening, Inequality, and Growth: A Model-Based Quantitative Evaluation -super-1,"
Review of Economic Studies,
Oxford University Press, vol. 73(1), pages 251-293.
- Robert M. Townsend & Kenichi Ueda, 2003. "Financial Deepening, Inequality, and Growth: A Model-Based Quantitative Evaluation," IMF Working Papers 03/193, International Monetary Fund.
- Quah, Danny T, 1997. " Empirics for Growth and Distribution: Stratification, Polarization, and Convergence Clubs," Journal of Economic Growth, Springer, vol. 2(1), pages 27-59, March.
- Quah, Danny, 1997. "Empirics for Growth and Distribution: Stratification, Polarization, and Convergence Clubs," CEPR Discussion Papers 1586, C.E.P.R. Discussion Papers.
- Kym Anderson, 2003. "Agriculture and Agricultural Policies in China and India Post-Uruguay Round," Centre for International Economic Studies Working Papers 2003-19, University of Adelaide, Centre for International Economic Studies.
- Robert M. Townsend & Kenichi Ueda, 2010.
"Welfare Gains From Financial Liberalization,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(3), pages 553-597, 08.
- Alejandro Nin Pratt & Bingxin Yu & Shenggen Fan, 2009. "The total factor productivity in China and India: new measures and approaches," China Agricultural Economic Review, Emerald Group Publishing, vol. 1(1), pages 9-22, February.
- Krusell, P. & Rios-Rull, J.V., 1993.
"Vested Interests in a Positive Theory of Stagnation and Growth,"
547, Stockholm - International Economic Studies.
- Krusell, Per & Rios-Rull, Jose-Victor, 1996. "Vested Interests in a Positive Theory of Stagnation and Growth," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 301-29, April.
- Quah, Danny, 1996.
"Twin Peaks: Growth and Convergence in Models of Distribution Dynamics,"
CEPR Discussion Papers
1355, C.E.P.R. Discussion Papers.
- Quah, Danny T, 1996. "Twin Peaks: Growth and Convergence in Models of Distribution Dynamics," Economic Journal, Royal Economic Society, vol. 106(437), pages 1045-55, July.
- Ray, Debraj & Streufert, Peter A, 1993. "Dynamic Equilibria with Unemployment Due to Undernourishment," Economic Theory, Springer, vol. 3(1), pages 61-85, January.
- Robert E. Hall & Charles I. Jones, 1999.
"Why Do Some Countries Produce So Much More Output Per Worker Than Others?,"
The Quarterly Journal of Economics,
MIT Press, vol. 114(1), pages 83-116, February.
- Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
- Marinella Terrasi, 1999. "Convergence and divergence across Italian regions," The Annals of Regional Science, Springer, vol. 33(4), pages 491-510.
- Mehra, Shakuntla, 1981. "Instability in Indian agriculture in the context of the new technology:," Research reports 25, International Food Policy Research Institute (IFPRI).
- Banerjee, Abhijit V & Newman, Andrew F, 1993.
"Occupational Choice and the Process of Development,"
Journal of Political Economy,
University of Chicago Press, vol. 101(2), pages 274-98, April.
- Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Glomm, Gerhard & Ravikumar, B, 1992. "Public versus Private Investment in Human Capital Endogenous Growth and Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 818-34, August.
- Stigler, George J, 1970. "Director's Law of Public Income Redistribution," Journal of Law and Economics, University of Chicago Press, vol. 13(1), pages 1-10, April.
- Alejandro Nin-Pratt & Bingxin Yu & Shenggen Fan, 2010. "Comparisons of agricultural productivity growth in China and India," Journal of Productivity Analysis, Springer, vol. 33(3), pages 209-223, June.
- Bryan Caplan, 2002. "Systematically Biased Beliefs About Economics: Robust Evidence of Judgemental Anomalies from the Survey of Americans and Economists on the Economy," Economic Journal, Royal Economic Society, vol. 112(479), pages 433-458, April.
- Sari Pekkala, 1999. "Regional convergence across the Finnish provinces and subregions, 1960-94," Finnish Economic Papers, Finnish Economic Association, vol. 12(1), pages 28-40, Spring.
- Lung-Fai Wong, 1989. "Agricultural Productivity in China and India: A Comparative Analysis," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 37(1), pages 77-93, 03.
- Jan Fagerberg & Bart Verspagen, 1996.
"Heading for Divergence? Regional Growth in Europe Reconsidered,"
Journal of Common Market Studies,
Wiley Blackwell, vol. 34(3), pages 431-448, 09.
- Fagerberg, Jan & Verspagen, Bart, 1996. "Heading for divergence? Regional growth in Europe reconsidered," Open Access publications from Maastricht University urn:nbn:nl:ui:27-18068, Maastricht University.
- Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Angela Fletcher).
If references are entirely missing, you can add them using this form.