Finance, Technology and Inequality in Economic Development

Abstract

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.

Financial Development and Income Inequality in China: An Application of SVAR Approach

“…Financial development increase income inequality as those with more endowments for learning become entrepreneurs. According to Ryo Horii et al [22], firms switching to a more productive and capital-intensive technologies for the improvement of the financial infrastructure widen income inequality.…”

The Relationship Between Income Inequality and Financial Development: Panel Data Analysis

“…According to those who advocate this view, income inequality between households will increase at some stages, if not at all stages of financial development. In their study, Horii et al (2005) argued that a better financial infrastructure contributes to the development of financial markets and thus supports economic development by allowing firms to use more productive and capital-intensive technologies. But in the presence of credit rationing, they have stated that this technological change increases income inequality.…”