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Finance, Technology and Inequality in Economic Development

  • Ryo Horii

    (Osaka University)

  • Ryoji Ohdoi

    (Osaka University)

  • Kazuhiro Yamamoto

    (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 firms' adoption of the currently used technology rather than the new one.

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Paper provided by EconWPA in its series Development and Comp Systems with number 0504004.

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Length: 40 pages
Date of creation: 12 Apr 2005
Date of revision: 31 Jul 2005
Handle: RePEc:wpa:wuwpdc:0504004
Note: Type of Document - pdf; pages: 40
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