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Financiers versus Engineers: Should the Financial Sector Be Taxed or Subsidized?

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  • Thomas Philippon

Abstract

I study the allocation of human capital in an economy with production externalities, financial constraints, and career choices. Agents choose to become entrepreneurs, workers, or financiers. Entrepreneurship has positive externalities but requires the services of financiers. In the second best solution, the financial sector should be taxed in exactly the same way as the nonfinancial sector. When direct subsidies to investment and scientific education are not feasible, subsidizing the financial sector increases growth if externalities are driven by physical capital as in Paul M. Romer (1986), and decreases growth if externalities are driven by human capital as in Robert E. Lucas, Jr. (1988). (JEL E44, H21, H25, L26, O41)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 2 (2010)
Issue (Month): 3 (July)
Pages: 158-82

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Handle: RePEc:aea:aejmac:v:2:y:2010:i:3:p:158-82

Note: DOI: 10.1257/mac.2.3.158
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  1. Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 40, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  3. Greenwood, Jeremy & Sanchez, Juan M & Wang, Cheng, 2007. "Financing Development: The Role of Information Costs," Staff General Research Papers, Iowa State University, Department of Economics 12848, Iowa State University, Department of Economics.
  4. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1990. "The Allocation of Talent: Implications for Growth," NBER Working Papers 3530, National Bureau of Economic Research, Inc.
  5. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Duffie Darrell & Rahi Rohit, 1995. "Financial Market Innovation and Security Design: An Introduction," Journal of Economic Theory, Elsevier, Elsevier, vol. 65(1), pages 1-42, February.
  7. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262061937, December.
  8. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 66, pages 467.
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Cited by:
  1. Thomas Philippon & Ariell Reshef, 2007. "Skill Biased Financial Development: Education, Wages and Occupations in the U.S. Financial Sector," NBER Working Papers 13437, National Bureau of Economic Research, Inc.
  2. Manganelli, Simone & Popov, Alexander, 2013. "Financial dependence, global growth opportunities, and growth revisited," Economics Letters, Elsevier, Elsevier, vol. 120(1), pages 123-125.
  3. Philippon, Thomas & Reshef, Ariell, 2009. "Wages and Human Capital in the U.S. Financial Industry: 1909-2006," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7282, C.E.P.R. Discussion Papers.
  4. Gründler, Klaus & Weitzel, Jan, 2013. "The financial sector and economic growth in a panel of countries," Wirtschaftswissenschaftliche Beiträge 123, Julius-Maximilians-Universität Würzburg, Lehrstuhl für Volkswirtschaftslehre, insbes. Wirtschaftsordnung und Sozialpolitik.
  5. Jürgen Janger & Klaus Nowotny, 2013. "Career choices in academia," WWWforEurope Working Papers series, WWWforEurope 36, WWWforEurope.
  6. Law, Siong Hook & Singh, Nirvikar, 2014. "Does too much finance harm economic growth?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 41(C), pages 36-44.

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