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Financial Intermediation and Occupational Choice in Development

  • Andres Erosa

    (University of Western Ontario)

This paper presents evidence that the spread between the marginal product of capital and the return on financial assets is mich higher in poor than in rich countries. A model with costly intermediation is developed. In this economy, individuals choose at each instant whether to work or to operate a technology. Entrepreneurs finance their business with their own savings and, if necessary, by borrowing from banks. I find that in this framework intermediation costs are not equivalent to a tax on the return of capital. The equivalence fails because costly intermediation not only affects the capital accumulation decision but also the occupational choice decision. I show that intermediation costs have important effects on per capita output and average business size in the economy. I conclude that taxing financial intermediaries can be a very bad policy for development (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1006/redy.2000.0117
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 4 (2001)
Issue (Month): 2 (April)
Pages: 303-334

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Handle: RePEc:red:issued:v:4:y:2001:i:2:p:303-334
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  1. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
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  8. Acemoglu, Daron & Zilibotti, Fabrizio, 1998. "Information Accumulation in Development," Seminar Papers 652, Stockholm University, Institute for International Economic Studies.
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