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Credit constraints and taxes: misallocation in a two-sector economy

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  • Julia Passabom Araujo

Abstract

Effects of misallocation in a two sector economy with different capital intensity technologies can be particularly large. This article proposes a model of occupational choice based on wealth and entrepreneurial talent in which individuals are subject to credit constraints and different tax-rates. Agents must choose between opening a business in a more, or less, capital intensive sector or being a wage worker. The model is calibrated to the Brazilian economy between 2000-2013. Regarding the effects of financial frictions, limiting credit availability to a less capital intensive sector can be worse in terms of efficiency, but less distortive in terms of income inequality. Taxation over a more capital intensive sector worsens aggregate productivity, although it can improve income distribution. Taxing wage workers have a lower impact on efficiency, but will be severely worse on equality.

Suggested Citation

  • Julia Passabom Araujo, 2016. "Credit constraints and taxes: misallocation in a two-sector economy," Working Papers, Department of Economics 2016_19, University of São Paulo (FEA-USP).
    • Handle: RePEc:spa:wpaper:2016wpecon19
    as

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    References listed on IDEAS

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    3. Robert M. Townsend & Kenichi Ueda, 2006. "Financial Deepening, Inequality, and Growth: A Model-Based Quantitative Evaluation -super-1," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(1), pages 251-293.
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    More about this item

    Keywords

    Capital intensity; credit frictions; taxation; entrepreneurship; misallocation;
    All these keywords.

    JEL classification:

    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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