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.
ASJC Scopus subject areas
- Economics and Econometrics