Financial infrastructure, technological shift, and inequality in economic development

This paper presents an overlapping generations model with technology choice and imperfect financial markets, and examines the evolution of income distribution in economic development. The model shows that improvements in financial infrastructure facilitate economic development both by raising the aggregate capital-labor ratio and by causing a technological shift to more capital-intensive technologies. While a higher capital-labor ratio under a given technology reduces inequality, a technological shift can lead to a concentration of the economic rents among a smaller number of agents. We derive the condition under which an improvement in financial infrastructure actually decreases the average utility of agents.