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Sectoral Differentiation, Allocation of Talent, and Financial Development

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  • Esteban Jaimovich

Abstract

I present a theory of development in which heterogeneously talented entrepreneurs require credit to start new projects and open new sectors. As the variety of sectors expands during development, the allocation of entrepreneurial talent improves. A key result of the paper is to show that, in addition to increasing the average productivity of the matches between agents and sectors, this process also mitigates informational frictions affecting the functioning of financial markets. Furthermore, the positive impact of sectoral variety on the efficiency of financial markets gives rise to a novel feedback between financial development and R&D effort, which may lead to different types of dynamics. A successful economy typically exhibits a progressive increase in the variety of sectors, which in turn helps to alleviate frictions in the 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 where the operation of financial markets is severely affected by talent mismatching.

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Bibliographic Info

Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 59.

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Length: 42 pages
Date of creation: 2007
Date of revision: 2009
Handle: RePEc:cca:wpaper:59

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Keywords: Adverse Selection; Informational Frictions; Talent Allocation; Sectoral Diversification; Financial Development.;

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Cited by:
  1. Eren Inci, 2007. "Occupational Choice and the Quality of Entrepreneurs," Boston College Working Papers in Economics 666, Boston College Department of Economics.
  2. Jaimovich, Esteban & Rud, Juan Pablo, 2014. "Excessive public employment and rent-seeking traps," Journal of Development Economics, Elsevier, vol. 106(C), pages 144-155.
  3. Giuseppe Coco & Giuseppe Pignataro, 2013. "Unfair credit allocations," Small Business Economics, Springer, vol. 41(1), pages 241-251, June.

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