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Misallocation of Capital in a Model of Endogenous Financial Intermediation and Insurance

  • Radim Bohacek


  • Hugo Rodríguez-Mendizábal


In this paper we analyze productivity and welfare losses from capital misallocation in a general equilibrium model of occupational choice and endogenous financial intermediation. We study the effects of borrowing and lending, insurance, and risk sharing on the optimal allocation of resources. We find that financial markets together with general equilibrium effects have large impact on entrepreneurs' entry and firm-size decisions. Efficiency gains are increasing in the quality of financial markets, particularly in their ability to alleviate a financing constraint by providing insurance against idiosyncratic risk.

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Paper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 867.11.

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Length: 45
Date of creation: 15 Mar 2011
Date of revision:
Handle: RePEc:aub:autbar:867.11
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  1. Marcelo Veracierto, 2000. "Employment flows, capital mobility, and policy analysis," Working Paper Series WP-00-5, Federal Reserve Bank of Chicago.
  2. Gomes, Joao F & Greenwood, Jeremy & Rebelo, Sérgio, 1997. "Equilibrium Unemployment," CEPR Discussion Papers 1602, C.E.P.R. Discussion Papers.
  3. Nick Bloom & John Van Reenen, 2010. "Why do Management Practices Differ Across Firms and Countries?," CEP Occasional Papers 26, Centre for Economic Performance, LSE.
  4. Anna L. Paulson & Robert M. Townsend & Alexander Karaivanov, 2006. "Distinguishing Limited Liability from Moral Hazard in a Model of Entrepreneurship," Journal of Political Economy, University of Chicago Press, vol. 114(1), pages 100-144, February.
  5. Richard Rogerson & Diego Restuccia, 2004. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," 2004 Meeting Papers 69, Society for Economic Dynamics.
  6. Cristina Arellano & Yan Bai & Jing Zhang, 2009. "Firm dynamics and financial development," Staff Report 392, Federal Reserve Bank of Minneapolis.
  7. Marco Cagetti & Mariacristina De Nardi, 2004. "Taxation, entrepreneurship and wealth," Working Papers 632, Federal Reserve Bank of Minneapolis.
  8. Yongseok Shin & Joe Kaboski & Francisco J. Buera, 2008. "Finance and Development: A Tale of Two Sectors," 2008 Meeting Papers 955, Society for Economic Dynamics.
  9. Bohacek, Radim, 2006. "Financial constraints and entrepreneurial investment," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 2195-2212, November.
  10. William M. Gentry & R. Glenn Hubbard, 2000. "Entrepreneurship and Household Saving," NBER Working Papers 7894, National Bureau of Economic Research, Inc.
  11. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2009. "Consumption and Labor Supply with Partial Insurance: An Analytical Framework," NBER Working Papers 15257, National Bureau of Economic Research, Inc.
  12. Gine, Xavier & Townsend, Robert M., 2003. "Evaluation of financial liberalization : a general equilibrium model with constrained occupation choice," Policy Research Working Paper Series 3014, The World Bank.
  13. Mariacristina De Nardi & Phil Doctor & Spencer D. Krane, 2007. "Evidence on entrepreneurs in the United States: data from the 1989–2004 survey of consumer finances," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 18-36.
  14. Andres Erosa & Ana Hidalgo, 2007. "On Finance as a Theory of TFP, Cross-Industry Productivity Differences, and Economic Rents," Working Papers tecipa-285, University of Toronto, Department of Economics.
  15. Barton H. Hamilton, 2000. "Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 604-631, June.
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