IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Sectoral differentiation, allocation of talent, and financial development

  • Jaimovich, Esteban

I present a theory of development in which heterogeneously talented entrepreneurs require credit to start new projects and open new sectors. During development the variety of sectors expands, which allows better sorting of entrepreneurial talent. The paper shows that, in addition to increasing the average productivity of matches between agents and sectors, this process also mitigates informational frictions in the financial markets. Furthermore, the impact of sectoral variety on the operation of financial markets gives rise to an interesting feedback between financial development and R&D effort, which may lead to different types of dynamics. A successful economy exhibits a progressive increase in the variety of sectors, which in turn enhances the operation of 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 severely inefficient credit to talented entrepreneurs.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 96 (2011)
Issue (Month): 1 (September)
Pages: 47-60

in new window

Handle: RePEc:eee:deveco:v:96:y:2011:i:1:p:47-60
Contact details of provider: Web page:

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.:

as in new window
  1. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers 2013-12, Brown University, Department of Economics.
  2. Audretsch, David B & Feldman, Maryann P, 1998. "Innovation in Cities: Science-Based Diversity, Specialization and Localized Competition," CEPR Discussion Papers 1980, C.E.P.R. Discussion Papers.
  3. Wacziarg, Romain & Imbs, Jean, 2000. "Stages of Diversification," Research Papers 1653, Stanford University, Graduate School of Business.
  4. Young, Allyn A., 1928. "Increasing Returns and Economic Progress," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, vol. 38, pages 527-542.
  5. Aghion, P. & Howitt, P., 1990. "A Model Of Growth Through Creative Destruction," DELTA Working Papers 90-12, DELTA (Ecole normale supérieure).
  6. Maitreesh Ghatak & Nien-Huei Jiang, 2000. "A Simple Model of Inequality, Occupational Choice, and Development," Vanderbilt University Department of Economics Working Papers 0007, Vanderbilt University Department of Economics.
  7. Grossman, G.M. & Helpman, E., 1989. "Quality Ladders And Product Cycles," Papers 39-89, Tel Aviv.
  8. Dan Bernhardt & Huw Lloyd-Ellis, 1993. "Enterprise, Inequality and Economic Development," Working Papers 893, Queen's University, Department of Economics.
  9. Saint-Paul, Gilles, 1992. "Technological choice, financial markets and economic development," European Economic Review, Elsevier, vol. 36(4), pages 763-781, May.
  10. Ross Levine & Sara Zervos, . "Stock markets, banks and economic growth ," CERF Discussion Paper Series 95-11, Economics and Finance Section, School of Social Sciences, Brunel University.
  11. Roubini, Nouriel & Sala-i-Martin, Xavier, 1992. "Financial repression and economic growth," Journal of Development Economics, Elsevier, vol. 39(1), pages 5-30, July.
  12. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June.
  13. Martin, Alberto, 2009. "A model of collateral, investment, and adverse selection," Journal of Economic Theory, Elsevier, vol. 144(4), pages 1572-1588, July.
  14. Jeremy Greenwood & Boyan Jovanovic, 1989. "Financial Development, Growth, and the Distribution of Income," NBER Working Papers 3189, National Bureau of Economic Research, Inc.
  15. Paul Romer, 1989. "Endogenous Technological Change," NBER Working Papers 3210, National Bureau of Economic Research, Inc.
  16. Miklós Koren & Silvana Tenreyro, 2004. "Technological diversification," Working Papers 05-1, Federal Reserve Bank of Boston.
  17. Kim, Sunwoong, 1989. "Labor Specialization and the Extent of the Market," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 692-705, June.
  18. Miklós Koren & Silvana Tenreyro, 2007. "Volatility and Development," The Quarterly Journal of Economics, Oxford University Press, vol. 122(1), pages 243-287.
  19. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  20. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
  21. Andreoni, James, 1989. "Giving with Impure Altruism: Applications to Charity and Ricardian Equivalence," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1447-58, December.
  22. Steven J. Davis & John Haltiwanger & Ron Jarmin & Javier Miranda, 2007. "Volatility and Dispersion in Business Growth Rates: Publicly Traded versus Privately Held Firms," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 107-180 National Bureau of Economic Research, Inc.
  23. Daron Acemoglu & Fabrizio Zilibotti, 1994. "Was Prometheus unbound by chance? Risk, diversification and growth," Economics Working Papers 98, Department of Economics and Business, Universitat Pompeu Fabra.
  24. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
  25. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
  26. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  27. Benjamin F. Jones, 2008. "The Knowledge Trap: Human Capital and Development Reconsidered," NBER Working Papers 14138, National Bureau of Economic Research, Inc.
  28. Rosen, Sherwin, 1978. "Substitution and Division of Labour," Economica, London School of Economics and Political Science, vol. 45(179), pages 235-50, August.
  29. Ramcharan Rodney, 2010. "The Link between the Economic Structure and Financial Development," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-37, May.
  30. Ghatak, Maitreesh & Morelli, Massimo & Sjostrom, Tomas, 2007. "Entrepreneurial talent, occupational choice, and trickle up policies," Journal of Economic Theory, Elsevier, vol. 137(1), pages 27-48, November.
  31. Russell Cooper & Andrew John, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, Oxford University Press, vol. 103(3), pages 441-463.
  32. Thomas Piketty, 1997. "The Dynamics of the Wealth Distribution and the Interest Rate with Credit Rationing," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 173-189.
  33. Dilip Mookherjee & Debraj Ray, 2000. "Contractual Structure and Wealth Accumulation," Econometric Society World Congress 2000 Contributed Papers 1538, Econometric Society.
  34. Acemoglu, Daron & Zilibotti, Fabrizio, 1998. "Information Accumulation in Development," Seminar Papers 652, Stockholm University, Institute for International Economic Studies.
  35. de Meza, David & Webb, David, 2000. "Does credit rationing imply insufficient lending?," Journal of Public Economics, Elsevier, vol. 78(3), pages 215-234, November.
  36. Robert Summers & Alan Heston, 1991. "The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950–1988," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 327-368.
  37. Miller, Robert A, 1984. "Job Matching and Occupational Choice," Journal of Political Economy, University of Chicago Press, vol. 92(6), pages 1086-120, December.
  38. Rodney Ramcharan, 2006. "Does Economic Diversification Lead to Financial Development? Evidence From topography," IMF Working Papers 06/35, International Monetary Fund.
  39. Garcia-Vega, Maria, 2006. "Does technological diversification promote innovation?: An empirical analysis for European firms," Research Policy, Elsevier, vol. 35(2), pages 230-246, March.
  40. Hellmuth Milde & John G. Riley, 1988. "Signaling in Credit Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 103(1), pages 101-129.
  41. Yang, Xiaokai & Borland, Jeff, 1991. "A Microeconomic Mechanism for Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 460-82, June.
  42. Ricardo Correa & Gustavo A. Suarez, 2009. "Firm volatility and banks: evidence from U.S. banking deregulation," Finance and Economics Discussion Series 2009-46, Board of Governors of the Federal Reserve System (U.S.).
  43. Henry G. Grabowski, 1968. "The Determinants of Industrial Research and Development: A Study of the Chemical, Drug, and Petroleum Industries," Journal of Political Economy, University of Chicago Press, vol. 76, pages 292.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:deveco:v:96:y:2011:i:1:p:47-60. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.