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Costly Intermediation And The Poverty Of Nations

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  • Shankha Chakraborty
  • Amartya Lahiri

Abstract

This article has two goals: (i) to reduce the 7-fold productivity differential required to explain the observed 33-fold income difference between the richest and poorest countries of the world; and (ii) to explain cross-country differences in the capital-output ratio. To achieve the first goal we modify the production function of the standard neoclassical growth model to include public capital whose provision is subject to intermediation costs. For the second goal we distort private investment by introducing credit frictions. The model, quantified using cross-country data, generates an income gap of 33 with productivity differences of "only" 3 under the measured variations in public and private capital. The required productivity gap declines even further, to 2.1, when we introduce a home-production sector. On the second goal, however, credit frictions do a poor job of explaining cross-country variations in the capital-output ratio. Copyright 2007 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Suggested Citation

  • Shankha Chakraborty & Amartya Lahiri, 2007. "Costly Intermediation And The Poverty Of Nations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(1), pages 155-183, February.
  • Handle: RePEc:ier:iecrev:v:48:y:2007:i:1:p:155-183
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    Cited by:

    1. Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2010. "Financing Development: The Role of Information Costs," American Economic Review, American Economic Association, vol. 100(4), pages 1875-1891, September.
    2. Germán Cubas, 2010. "Accounting for Cross-Country Income Differences with Public Capital," Documentos de trabajo 2010014, Banco Central del Uruguay.
    3. Chakraborty Shankha & Dabla-Norris Era, 2011. "The Quality of Public Investment," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-29, August.
    4. Soete, Luc & Verspagen, Bart & Ziesemer, Thomas, 2017. "The productivity effect of public R&D in the Netherlands," MERIT Working Papers 021, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    5. Hung-ju Chen & Hsiao-tang Hsu, 2005. "The Role Of Firm Size In Controlling Output Decline During The Asian Financial Crisis," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 30(2), pages 103-129, December.
    6. Hallonsten, Jan Simon & Ziesemer, Thomas, 2016. "A semi-endogenous growth model for developing countries with public factors, imported capital goods, and limited export demand," MERIT Working Papers 004, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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