Technological choice, financial markets and economic development

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Abstract

Capital markets make possible the spreading of risk through financial diversification. Without such markets, agents can limit risk only by choosing less specialized and less productive technologies (technological diversification). This interaction may lead to multiple equilibria. In the ‘low’ one, financial services are underdeveloped, and technology is unspecialized. The opposite is true in the ‘high’ equilibrium. The model is extended to account for multiple growth paths and divergence across identical countries.

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The author thanks Olivier Blanchard, Eihanan Helpman, an anonymous referee and participants at the 1990 EEA congress for helpful comments and suggestions. Special thanks to Jean Waelbroeck for numerous suggestions which greatly contributed to improve the paper.

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