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

  • Andres Erosa
  • Ana Hidalgo

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.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-200.

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Length: 43 pages
Date of creation: 11 Oct 2005
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-200
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  12. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output Per Worker Than Others?," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 83-116, February.
  13. Krusell, Per & Rios-Rull, Jose-Victor, 1996. "Vested Interests in a Positive Theory of Stagnation and Growth," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 301-29, April.
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