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Financiers versus Engineers: Should the Financial Sector Be Taxed or Subsidized?

  • Thomas Philippon

I study the allocation of human capital in an economy with production externalities, financial constraints, and career choices. Agents choose to become entrepreneurs, workers, or financiers. Entrepreneurship has positive externalities but requires the services of financiers. In the second best solution, the financial sector should be taxed in exactly the same way as the nonfinancial sector. When direct subsidies to investment and scientific education are not feasible, subsidizing the financial sector increases growth if externalities are driven by physical capital as in Paul M. Romer (1986), and decreases growth if externalities are driven by human capital as in Robert E. Lucas, Jr. (1988). (JEL E44, H21, H25, L26, O41)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mac.2.3.158
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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 2 (2010)
Issue (Month): 3 (July)
Pages: 158-82

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Handle: RePEc:aea:aejmac:v:2:y:2010:i:3:p:158-82
Note: DOI: 10.1257/mac.2.3.158
Contact details of provider: Web page: https://www.aeaweb.org/aej-macro
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  1. Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2010. "Financing Development: The Role of Information Costs," American Economic Review, American Economic Association, vol. 100(4), pages 1875-91, September.
  2. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1990. "The Allocation of Talent: Implicationsfor Growth," University of Chicago - George G. Stigler Center for Study of Economy and State 65, Chicago - Center for Study of Economy and State.
  3. Bengt Holmstrom & Jean Tirole, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," Working papers 95-1, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April.
  5. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  6. Duffie Darrell & Rahi Rohit, 1995. "Financial Market Innovation and Security Design: An Introduction," Journal of Economic Theory, Elsevier, vol. 65(1), pages 1-42, February.
  7. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, June.
  8. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
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