Financial Institutions, Technology Diffusion and Trade

Abstract

This paper investigates the source of different rates of technology diffusion when economies differ in borrowing constraints arising from the quality of financial institutions. I introduce borrowing constraints to the vintage human capital model, to demonstrate slower technology adoption and longer technology use when borrowing constraints are tighter. I then show when economies differentiated by such constraints interact through trade, the relative difference in borrowing constraints gives rise to a pattern of technology adoption where frontier technologies are exclusively adopted in rich countries, and then trickle down to poor countries. I assess the theoretical results quantitatively, and show that large cross country per capita output differences can be readily generated.