Econometrica: Jul 2016, Volume 84, Issue 4

Why Doesn't Technology Flow from Rich to Poor Countries?

DOI: 10.3982/ECTA11150
p. 1477-1521

Harold L. Cole, Jeremy Greenwood, Juan M. Sanchez

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 lessā€promising ventures than in the United States, despite lower input prices.

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Supplement to "Why Doesn't Technology Flow from Rich to Poor Countries?"

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Supplement to "Why Doesn't Technology Flow from Rich to Poor Countries?"

The online appendix contains two sections, namely Sections 14 and 15.  Section 14 deals with theoretical aspects of the analysis.  In particular, it provides the proofs for all of the lemmas in paper.  Section 15 pertains to the empirical work and discusses the data used.

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