Why Doesn't Technology Flow From Rich to Poor Countries?
Harold L. Cole, Jeremy Greenwood, Juan M. Sanchez
Econometrica · 2016 · Volume 84 · Issue 4
Abstract
What is the role of a country's financial system in determining technology adoption? To examine this, a dynamic contract model is embedded into a general equilibrium setting with competitive intermediation. The terms of finance are dictated by an intermediary's ability to monitor and control a firm's cash flow, in conjunction with the structure of the technology that the firm adopts. It is not always profitable to finance promising technologies. A quantitative illustration is presented where financial frictions induce entrepreneurs in India and Mexico to adopt less-promising ventures than in the United States, despite lower input prices.
Keywords
Costly cash-flow control, costly state verification, dynamic contract theory, economic development, establishment-size distributions, finance and development, financial intermediation, India, Mexico, and the United States, monitoring, productivity, retained earnings, self-finance, technology adoption, ventures
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