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Finance, Technology and Inequality in Economic Development

  • Ryo Horii

    ()

    (Graduate School of Economics, Osaka University)

  • Ryoji Ohdoi

    ()

    (Graduate School of Economics, Osaka University)

  • Kazuhiro Yamamoto

    ()

    (Graduate School of Economics, Osaka University)

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 firmsf adoption of the currently used technology rather than the new one.

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File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0508R.pdf
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Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 05-08-Rev.

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Length: 43 pages
Date of creation: Apr 2005
Date of revision: Aug 2005
Handle: RePEc:osk:wpaper:0508r
Contact details of provider: Web page: http://www.econ.osaka-u.ac.jp/
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