What Does the Walrasian Auctioneer Know? Technology Adoption and Financial Innovation

This paper proposes the view that financial development and economic growth are linked through the characteristics of technology. Perhaps the most obvious connection between technology and financial innovation emerges through risk-sharing. Technology is modeled as a distribution function over output values. While progress allows higher output values to be attained, it also changes the risk profile faced by economic agents. Technology adoption depends on the ability of the financial sector (the auctioneer) to price the new contingencies, therefore expanding the set of risk-sharing contracts offered to economic agents. The auctioneer is less knowledgeable about new technologies relative to entrepreneurs. As very high skilled entrepreneurs adopt the new technology, the auctioneer gradually learns how to price it. An implication of the analysis is the notion that financial development promotes economic growth only to the extent that it enhances the adoption of new technologies. JEL Codes: G20, N20, O30. ∗Address: [email protected], http://www.cemfi.es/~a-fernandes/.