Seminar: Rasim Burak Uras, Washington University in St. Louis.

Title: Productive Entrepreneurship and Economic Development with Limited Contract Enforcement.

Abstract

Cross-country data shows a positive correlation between a nation’s contract enforcement level and its ability to adopt modern technologies. I study the role entrepreneurial incentives play in shaping this empirical observation. I develop and solve a life-cycle model with limited financial contract enforcement, entrepreneurial heterogeneity (ability and financial pledgeability) and technology choice. In the model production processes can be undertaken using either the Traditional or the Modern technology. Depending on the entrepreneurial ability, the modern technology can

be more productive relative to the traditional technology, but the former requires a long-term investment making entrepreneur’s pledgeability important in his choice. In equilibrium the level of contract enforcement and entrepreneurial characteristics endogenously determine (1) the investment size and (2) the technology choice. Key results of the paper indicate that when financial enforcement is weak, the investment size and the intensity of modern technology use of entrepreneurial firms are positively correlated with financial pledgeability. Collateral-building associated with short term investment is important for the results. I calibrate the model to study its quantitative properties. Quantitative experiments illustrate sizeable positive effects of financial contract enforcement on aggregate output and aggregate modern technology adoption for the U.S. economy. Furthermore, counterfactual analysis shows that if financial contract enforcement in Turkey (a low enforcement economy) improves to the U.S. level (a high enforcement economy), output rises by 13-15%; and one third of this change is due to the increase in the rate of modern technology adoption.