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Finance, Technology and Inequality in Economic Development

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Author Info

  • Ryo Horii

    (Osaka University)

  • Ryoji Ohdoi

    (Osaka University)

  • Kazuhiro Yamamoto

    (Osaka University)

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 firms' adoption of the currently used technology rather than the new one.

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File URL: http://128.118.178.162/eps/dev/papers/0504/0504004.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Development and Comp Systems with number 0504004.

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Length: 40 pages
Date of creation: 12 Apr 2005
Date of revision: 31 Jul 2005
Handle: RePEc:wpa:wuwpdc:0504004

Note: Type of Document - pdf; pages: 40
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Web page: http://128.118.178.162

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Keywords: Enforcement; Technological Switch; Income Distribution; Credit Rationing; Institutions.;

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Cited by:
  1. Kerstin Gerling, 2008. "The Real Consequences of Financial Market Integration when Countries Are Heterogeneous," Working Papers 141, Oesterreichische Nationalbank (Austrian Central Bank).
  2. Radhika Lahiri & Shyama Ratnasiri, 2007. "Concerning Inequality, Technology Adoption, and Structural Change," International Advances in Economic Research, Springer, vol. 13(4), pages 527-528, November.

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