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Can Technological Progress Lower Incomes? New Results on Lemons Models
Working paper
Karla Hoff, Andrew Lyon
May 1996 |
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| This paper derives sufficient conditions for the net effect of the technological change to be positive: (i)the distribution of the quality of projects is continuous, and (ii)lenders correctly anticipate the change in the average quality of borrowers as a result of new entry (rational expectations). When these conditions hold, changes in the interest rate charged to all borrowers fully reflect changes in the average quality of applications for credit, and the rise in the lemons premium limits the new entry of negative value projects. Under these conditions, adverse selection cannot prevent growth in response to a technological change. This paper also presents an example with a discrete distribution in the quality of projects to demonstrate the possibility that an improvement in technology decreases aggregate income. |
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| Last updated on: 12/21/2006 |
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