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Finance, Technology and Inequality in Economic Development

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  • Ryo Horii

    () (Graduate School of Economics, Osaka University)

  • Ryoji Ohdoi

    () (Graduate School of Economics, Osaka University)

  • Kazuhiro Yamamoto

    () (Graduate School of Economics, Osaka University)

Abstract

This paper develops an overlapping generations model with technology choice and imperfect credit market, in order to investigate a possible source of underdevelopment. Consistent with empirical observations in the literature, the model shows that better financial institutions that provide stronger enforceability of contracts facilitate the development of financial markets, which in turn enables firms to switch to more 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 institutions to the level at whic the technological switch occurs, resulting in a development trap. A remedy is to facilitate small firms fadoption of existing technology, rather than the newone.

Suggested Citation

  • Ryo Horii & Ryoji Ohdoi & Kazuhiro Yamamoto, 2005. "Finance, Technology and Inequality in Economic Development," Discussion Papers in Economics and Business 05-08, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  • Handle: RePEc:osk:wpaper:0508
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    Cited by:

    1. repec:spr:manint:v:49:y:2009:i:1:d:10.1007_s11575-008-0122-9 is not listed on IDEAS
    2. 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.
    3. Kerstin Gerling, 2008. "The Real Consequences of Financial Market Integration when Countries Are Heterogeneous," Working Papers 141, Oesterreichische Nationalbank (Austrian Central Bank).

    More about this item

    Keywords

    Enforceability of Contracts; Technological Switch; Income Distribution; Credit Rationing; Development Trap.;

    JEL classification:

    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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