Capital Market Imperfections as an Origin of Barriers to Capital Accumulation and Low TFP

We propose a theory were capital market imperfections endogenously generate low TFP and barriers to capital accumulation. We assume that countries are identical but they di¤er in their ability to enforce loan con-tracts and we show that, in the presence of asymmetric information, coun-tries with low enforcement use ine¢cient technologies in equilibrium. Our …ndings thus formalize the view that asymmetric information problems in the capital markets are more severe in poor than rich countries. Our theory can easily be amended so that poor countries not only have low aggregate TFP but that they are particularly ine¢cient in the produc-tion of investment goods. As a result, these countries are characterized by a high relative price of investment goods and a low real investment rate. Our theory also suggests that entrepreneurs have a vested interest in maintaining a status quo with low enforcement since this allows them to extract rents from the factor services they hire