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Sectors Expansion, Allocation of Talent and Adverse Selection in Development

  • Esteban Jaimovich
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    This paper proposes a theory in which informational failures hindering an efficient operation of the economy are solved over the course development. Individuals are heterogeneous in terms of entrepreneurial talent, exhibiting different comparative advantages. Talent is subject to private information, giving rise to adverse selection problems. In this paper, adverse selection stems from sectors scarcity, which prevents some individuals from finding their "appropriate" sector. The availability of many sectors facilitates the allocation of individuals' unobservable talent. As a result, sectors expansion fosters growth because it helps to solve adverse selection problems. Successful long-run development is characterised by a continuous process of sectoral expansion, improved allocation of talent, and more efficient operation of financial institutions. Nevertheless, this model may also lead to poverty-traps; where economies are confined to a rudimentary situation with few sectors, poor allocation of talent, and underdeveloped financial institutions.

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    Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c011_018.

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    Length: 38 pages JEL Classification: O10, O16, O31, D82
    Date of creation: Jun 2006
    Date of revision:
    Handle: RePEc:deg:conpap:c011_018
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