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Financial development and occupational choice

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  • Hill, Enoch
  • Perez-Reyna, David

Abstract

In this paper we incorporate occupational choice in the style of Lucas (1978) with an additional dimension of heterogeneity in wealth into a model of banking. We use this model to better understand how development of the financial sector affects misallocation and occupational choice. Our model demonstrates three channels through which enforcement of credit contracts are tied to misallocation. Improvements in enforcement shifts the risks in variance of output from banks toward entrepreneurs; consequently, improved enforcement can serve as a form of risk sharing in the absence of state contingent loans. Second, reduction in the risk for bankers improves the appeal of banking and the general equilibrium effect shrinks the margin of intermediation, reducing the importance of initial wealth distributions. Finally, improved enforcement leads to more relaxed credit constraints, as banks are willing to lend more to entrepreneurs, further reducing the importance of initial wealth in occupational choice.

Suggested Citation

  • Hill, Enoch & Perez-Reyna, David, 2017. "Financial development and occupational choice," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 393-409.
  • Handle: RePEc:eee:jmacro:v:54:y:2017:i:pb:p:393-409
    DOI: 10.1016/j.jmacro.2017.05.009
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    References listed on IDEAS

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    Cited by:

    1. Lopez-Martin, Bernabe & Perez-Reyna, David, 2021. "Contracts, firm dynamics, and aggregate productivity," Journal of Economic Dynamics and Control, Elsevier, vol. 130(C).
    2. Jeremy Greenwood & Juan Sanchez & Cheng Wang, 2013. "Quantifying the Impact of Financial Development on Economic Development," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 194-215, January.
    3. Perez-Reyna, David & Villamizar-Villegas, Mauricio, 2019. "Exchange rate effects of financial regulations," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 228-245.
    4. Kai Ding & Enoch Hill & David Perez-Reyna, 2021. "Optimal capital requirements with noisy signals on banking risk," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(4), pages 1649-1687, June.

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    More about this item

    Keywords

    Financial development; Misallocation; Occupational choice;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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