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Misallocation of Capital in a Model of Endogenous Financial Intermediation and Insurance

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  • Radim Bohacek
  • Hugo Rodréguez-Mendizébal

Abstract

In this paper we analyze productivity and welfare losses from capital misallocation in a general equilibrium model of occupational choice and endogenous financial intermediation. We study the effects of borrowing and lending, insurance, and risk sharing on the optimal allocation of resources. We find that financial markets together with general equilibrium effects have large impact on entrepreneurs entry and firm-size decisions. Efficiency gains are increasing in the quality of financial markets, particularly in their ability to alleviate a financing constraint by providing insurance against idiosyncratic risk.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 543.

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Date of creation: Feb 2011
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Handle: RePEc:bge:wpaper:543

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Keywords: Financial markets and the macroeconomy; Occupational choice; Personal income and wealth and their distributions;

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  1. Marcelo Veracierto, 2000. "Employment flows, capital mobility, and policy analysis," Working Paper Series, Federal Reserve Bank of Chicago WP-00-5, Federal Reserve Bank of Chicago.
  2. Anna L. Paulson & Robert M. Townsend & Alexander Karaivanov, 2006. "Distinguishing Limited Liability from Moral Hazard in a Model of Entrepreneurship," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 114(1), pages 100-144, February.
  3. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2009. "Consumption and labor supply with partial insurance: an analytical framework," Staff Report, Federal Reserve Bank of Minneapolis 432, Federal Reserve Bank of Minneapolis.
  4. Bohacek, Radim, 2006. "Financial constraints and entrepreneurial investment," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(8), pages 2195-2212, November.
  5. Gomes, Joao & Greenwood, Jeremy & Rebelo, Sergio, 2001. "Equilibrium unemployment," Journal of Monetary Economics, Elsevier, Elsevier, vol. 48(1), pages 109-152, August.
  6. Andrés Erosa & Ana Hidalgo Cabrillana, 2008. "On Finance As A Theory Of Tfp, Cross-Industry Productivity Differences, And Economic Rents," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(2), pages 437-473, 05.
  7. Cristina Arellano & Yan Bai & Jing Zhang, 2009. "Firm Dynamics and Financial Development," NBER Working Papers 15193, National Bureau of Economic Research, Inc.
  8. Mariacristina De Nardi & Phil Doctor & Spencer D. Krane, 2007. "Evidence on entrepreneurs in the United States: data from the 1989–2004 survey of consumer finances," Economic Perspectives, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Q IV, pages 18-36.
  9. Marco Cagetti & Mariacristina De Nardi, 2006. "Taxation, entrepreneurship, and wealth," Working Paper Series, Federal Reserve Bank of Chicago WP-06-07, Federal Reserve Bank of Chicago.
  10. Francisco J. Buera & Joseph Kaboski & Yongseok Shin, 2009. "Finance and Development: A Tale of Two Sectors," NBER Working Papers 14914, National Bureau of Economic Research, Inc.
  11. Nick Bloom & John Van Reenen, 2010. "Why do Management Practices Differ Across Firms and Countries?," CEP Occasional Papers, Centre for Economic Performance, LSE 26, Centre for Economic Performance, LSE.
  12. Gine, Xavier & Townsend, Robert M., 2003. "Evaluation of financial liberalization : a general equilibrium model with constrained occupation choice," Policy Research Working Paper Series 3014, The World Bank.
  13. Richard Rogerson & Diego Restuccia, 2004. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," 2004 Meeting Papers, Society for Economic Dynamics 69, Society for Economic Dynamics.
  14. Barton H. Hamilton, 2000. "Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 108(3), pages 604-631, June.
  15. William M. Gentry & R. Glenn Hubbard, 2000. "Entrepreneurship and Household Saving," NBER Working Papers 7894, National Bureau of Economic Research, Inc.
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