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

What determines the technology that a country adopts? While there could be many factors, the e¢ ciency of the country’s …nancial system may play a signi…cant role. To address this question, a dynamic contract model is embedded into a general equilibrium setting with competitive intermediation. The ability of an intermediary to monitor and control the cash ‡ows of a …rm plays an important role in a …rm’s decision to adopt a technology. Can such a theory help to explain the di¤erences in total factor productivity and establishment-size distributions across India, Mexico, and the U.S.? Applied analysis suggests that answer is yes. Keywords: Costly cash-‡ow control; costly state veri…cation; dynamic contract theory; economic development; establishment-size distributions; …nancial intermediation; India, Mexico, and the U.S.; monitoring; productivity; technology adoption; underwriting; ventures A­ iations: University of Pennsylvania and Federal Reserve Bank of St. Louis This research was previously circulated under the title “Underwriting Ventures: Trust but Verify.” Comments are welcome. Please contact Hal Cole at colehl sas.upenn.edu