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Sectoral differentiation, allocation of talent, and financial development

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  • Jaimovich, Esteban

Abstract

I present a theory of development in which heterogeneously talented entrepreneurs require credit to start new projects and open new sectors. During development the variety of sectors expands, which allows better sorting of entrepreneurial talent. The paper shows that, in addition to increasing the average productivity of matches between agents and sectors, this process also mitigates informational frictions in the financial markets. Furthermore, the impact of sectoral variety on the operation of financial markets gives rise to an interesting feedback between financial development and R&D effort, which may lead to different types of dynamics. A successful economy exhibits a progressive increase in the variety of sectors, which in turn enhances the operation of financial markets. However, a poverty trap may also arise. This situation is characterised by a rudimentary productive structure with poor matching of skills to activities and severely inefficient credit to talented entrepreneurs.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 96 (2011)
Issue (Month): 1 (September)
Pages: 47-60

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Handle: RePEc:eee:deveco:v:96:y:2011:i:1:p:47-60

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Web page: http://www.elsevier.com/locate/devec

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Keywords: Adverse selection Talent allocation Sectoral diversification Financial development;

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Cited by:
  1. Esteban Jaimovich & Juan Pablo Rud, 2009. "Excessive Public Employment and Rent-Seeking Traps," Carlo Alberto Notebooks 118, Collegio Carlo Alberto.
  2. Giuseppe Coco & Giuseppe Pignataro, 2013. "Unfair credit allocations," Small Business Economics, Springer, vol. 41(1), pages 241-251, June.
  3. Inci, Eren, 2013. "Occupational choice and the quality of entrepreneurs," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 1-21.

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