TITLE:
Demographic Structure and Productivity Catch-Up: Theory and Evidence
AUTHORS:
Yue Li, Chu-Ping Lo
KEYWORDS:
China, India, Folk Financing, Misallocation, Credit Constraint
JOURNAL NAME:
Modern Economy,
Vol.14 No.2,
February
6,
2023
ABSTRACT: A simple model is presented to show that
productivity growth falls with firm age in a country with well-developed
financial market (e.g., the U.S.), but increases with firm age in a country
with poor financial development (e.g., India). However, although being poor in
formal financial development, China’s prosperous folk financing helps small
young firms break through the limitation of credit constraint, achieving higher
productivity growth than the old ones. This paper suggests that governments
should support start-ups through financial development, a complement rather
than a complete replacement of folk financing, to encourage the creation of
more productive new companies.