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On Finance as a Theory of TFP, Cross-Industry Productivity Differences, and Economic Rents

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Author Info
Andres Erosa
Ana Hidalgo

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Abstract

We develop a theory of capital-market imperfections to study how the ability to enforce contracts affects resource allocation across entrepreneurs of different productivities, and across industries with different needs for external financing. The theory implies that countries with a poor ability to enforce contracts are characterized by the use of inefficient technologies, low aggregate TFP, low development of financial markets, large differences in labor productivity across industries, and large employment shares in industries with low productivity. These implications of our theory are supported by the empirical evidence. The theory also suggests that entrepreneurs have a vested interest in maintaining a status quo with low enforcement since it allows them to extract rents from the factor services they hire.

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File URL: http://repec.economics.utoronto.ca/files/tecipa-285.pdf
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Publisher Info
Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-285.

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Length: 52 pages
Date of creation: 03 Apr 2007
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Handle: RePEc:tor:tecipa:tecipa-285

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Postal: 150 St. George Street, Toronto, Ontario
Phone: (416) 978-5283
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Related research
Keywords: Macroeconmics Capital Market Imperfections Total-factor Productivity Relative Prices Sectorial Allocation Limited Enforcement

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Find related papers by JEL classification:
E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

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  13. Rui Castro & Gian Luca Clementi & Glenn MacDonald, 2004. "Investor Protection, Optimal Incentives, and Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 119(3), pages 1131-1175, August. [Downloadable!] (restricted)
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