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On Capital Market Imperfections as a Source of Low TFP and Economic Rents

Author

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  • Andres Erosa
  • Ana Hidalgo

Abstract

We propose a theory in which 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 resource allocation to and across entrepreneurs. Our theory implies that countries with a low ability to enforce contracts use inefficient technologies in equilibrium and are characterized by differences in productivity across industries. These implications of our theory are supported by the empirical evidence. 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.

Suggested Citation

  • Andres Erosa & Ana Hidalgo, 2005. "On Capital Market Imperfections as a Source of Low TFP and Economic Rents," Working Papers tecipa-200, University of Toronto, Department of Economics.
  • Handle: RePEc:tor:tecipa:tecipa-200
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    File URL: https://www.economics.utoronto.ca/public/workingPapers/tfperosa.pdf
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    References listed on IDEAS

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    Cited by:

    1. Stella, Andrea, 2015. "Firm dynamics and the origins of aggregate fluctuations," Journal of Economic Dynamics and Control, Elsevier, pages 71-88.
    2. Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2009. "Financing development : the role of information costs," Working Paper 08-08, Federal Reserve Bank of Richmond.
    3. Pedro S. Amaral & Erwan Quintin, 2005. "Finance Matters," Macroeconomics 0502007, EconWPA.
    4. Daron Acemoglu & Pol Antràs & Elhanan Helpman, 2007. "Contracts and Technology Adoption," American Economic Review, American Economic Association, pages 916-943.
    5. Bernardo Morais, 2011. "Should I Stay or Should I Go: Investor Protection, Firm Selection and Aggregate Productivity," 2011 Meeting Papers 878, Society for Economic Dynamics.
    6. Jeremy Greenwood & Juan Sanchez & Cheng Wang, 2013. "Quantifying the Impact of Financial Development on Economic Development," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 194-215, January.
    7. Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2010. "Financing Development: The Role of Information Costs," American Economic Review, American Economic Association, pages 1875-1891.
    8. Rui Castro & Gian Luca Clementi & Glenn Macdonald, 2009. "Legal Institutions, Sectoral Heterogeneity, and Economic Development," Review of Economic Studies, Oxford University Press, pages 529-561.
    9. Hyeok Jeong & Robert Townsend, 2007. "Sources of TFP growth: occupational choice and financial deepening," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 179-221.
    10. Barseghyan, Levon & DiCecio, Riccardo, 2016. "Externalities, endogenous productivity, and poverty traps," European Economic Review, Elsevier, pages 112-126.
    11. Nezih Guner & Gustavo Ventura & Xu Yi, 2008. "Macroeconomic Implications of Size-Dependent Policies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 721-744, October.
    12. CHANDER, Parkash & TULKENS, Henry, "undated". "Cooperation, stability, and self-enforcement in international environmental agreements: a conceptual discussion," CORE Discussion Papers RP 2092, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    13. 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).
    14. repec:rim:rimwps:05-07 is not listed on IDEAS
    15. Pedro S. Amaral & Erwan Quintin, 2005. "Finance Matters," Macroeconomics 0502007, EconWPA.
    16. Ryo Horii & Ryoji Ohdoi & Kazuhiro Yamamoto, 2005. "Finance, Technology and Inequality in Economic Development," Discussion Papers in Economics and Business 05-08-Rev, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Aug 2005.
    17. Antonio Antunes & Tiago Cavalcanti & Anne Villamil, 2006. "The Effect of Financial Repression & Enforcement on Entrepreneurship and Economic Development," Development Economics Working Papers 21816, East Asian Bureau of Economic Research.
    18. Daron Acemoglu & Pol Antràs & Elhanan Helpman, 2007. "Contracts and Technology Adoption," American Economic Review, American Economic Association, pages 916-943.

    More about this item

    Keywords

    Capital market imperfections; Total factor productivity; Relative price distortions; Taxation.;

    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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