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Sectoral differentiation, allocation of talent, and financial development

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  • Jaimovich, Esteban

Abstract

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.

Suggested Citation

  • Jaimovich, Esteban, 2011. "Sectoral differentiation, allocation of talent, and financial development," Journal of Development Economics, Elsevier, vol. 96(1), pages 47-60, September.
  • Handle: RePEc:eee:deveco:v:96:y:2011:i:1:p:47-60
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    Cited by:

    1. Giuseppe Coco & Giuseppe Pignataro, 2013. "Unfair credit allocations," Small Business Economics, Springer, vol. 41(1), pages 241-251, June.
    2. Inci, Eren, 2013. "Occupational choice and the quality of entrepreneurs," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 1-21.
    3. Esteban Jaimovich, 2010. "Adverse Selection and Entrepreneurship in a Model of Development," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(1), pages 77-100, March.
    4. Faizan, Riffat & Haque, Adnan ul, 2016. "The Relationship between Societal attributes, Feminine Leadership & Management Style: Responses from Pakistan's Urban Region Female-Owned Businesses," MPRA Paper 73458, University Library of Munich, Germany, revised 21 Aug 2016.
    5. Jaimovich, Esteban & Rud, Juan Pablo, 2014. "Excessive public employment and rent-seeking traps," Journal of Development Economics, Elsevier, vol. 106(C), pages 144-155.
    6. Alessio Moro, 2015. "Structural Change, Growth, and Volatility," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(3), pages 259-294, July.

    More about this item

    Keywords

    Adverse selection Talent allocation Sectoral diversification Financial development;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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