The Effect of Financial Development on Convergence: Theory and Evidence*

We introduce imperfect creditor protection in a multicountry Schumpeterian growth model. The theory predicts that any country with more than some critical
\nlevel of financial development will converge to the growth rate of the world technology frontier, and that all other countries will have a strictly lower long-run
\ngrowth rate. We present evidence supporting these and other implications, in the form of a cross-country growth regression with a significant and sizable negative
\ncoefficient on initial per-capita GDP (relative to the United States) interacted with financial intermediation. In addition, we find that other variables representing
\nschooling, geography, health, policy, politics,…