International Lending with Increasing Returns and Moral Hazard
Thomas J. Snyder

Abstract
This paper examines the effects of increasing returns on international lending and borrowing with moral hazard. Introducing increasing returns in a two-country general equilibrium model yields possible multiple equilibria and helps explain the possibility of capital flows from a poor to a rich country. A country may need to borrow sufficient amounts internationally to reach a minimum investment threshold in order to invest domestically.

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