Financial Institutions, Technology Diffusion and Trade

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.