We propose a theory where capital market imperfections are at the origin of cross-country TFP differences. In our theory entrepreneurs have private information about the multifactor productivity of their technology. We study how the contracting environment, as described by the ability to enforce contracts, affects the provision of incentives and, thus, resource allocation to and across entrepreneurs. We assume that countries differ in the ability to enforce contracts and show that, in the presence of assymmetric information, countries with low enforcement use inefficient technologies in equilibrium and are characterized by differences in productivity across industries. Our theory also suggests that entrepreneurs have a vested interest in maintaining a status quo with low enforcement since it allows them to extract rents from the factor services they hire.
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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number
16.
Length: Date of creation: 2004 Date of revision: Handle: RePEc:red:sed004:16
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Find related papers by JEL classification: E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy O1 - Economic Development, Technological Change, and Growth - - Economic Development O49 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Other E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
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