This paper presents a theory in which economic development manifests itself primarily as a process of sectoral differentiation. As the variety of sectors expands, the allocation of heterogeneously talented individuals improves. The paper claims that, besides increasing the average productivity of the economy, this process also mitigates informational frictions a¤ecting the performance of financial markets. In particular, sectoral differentiation alle- viates adverse selection problems linked to the allocation of talent, which would prevent the efficient operation of financial markets. Over the path of development, an economy typically exhibits a continuous increase in the variety of productive activities available to its individuals, and this leads to a reduction in agency-costs faced by financial institutions. However, the paper shows that a poverty-trap may also arise. This undesirable situation is characterised by a rudimentary productive structure, where agents find it very difficult to exercise their skills, and financial markets operation is severely affected by the talent mismatching.
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Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number
59.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Massimiliano Amarante & F. Maccheroni & M. Marinacci & L. Montrucchio, 2005.
"Cores of non-atomic market games,"
Discussion Papers
0506-10, Columbia University, Department of Economics.
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