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The Effect of Financial Repression & Enforcement on Entrepreneurship and Economic Development

Author

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  • Antonio Antunes

    (Universidade Nova de Lisboa)

  • Tiago Cavalcanti
  • Anne Villamil

Abstract

This paper studies the effect of financial repression and contract enforcement on en-trepreneurship and economic development. We construct and solve a general equilibrium model with heterogeneous agents, occupational choice and two financial frictions : intermediation costs and financial contract enforcement. Occupational choice and firm size are determined endogenously, and depend on agent type (wealth and ability) and the credit market frictions. The model shows that differences across countries in intermediation costs and enforcement generate di.erences in occupational choice, firm size, credit, output and inequality. Counterfactual experiments are performed for Latin American, European, transition and high growth Asian countries. We use empirical estimates of each countrys financial frictions, and United States values for all other parameters. The results allow us to isolate the quantitative e.ect of these financial frictions in explaining the performance gap between each country and the United States. The results depend critically on whether a general equilibrium factor price effect is operative, which in turn depends on whether financial markets are open or closed. This yields a positive policy prescription : If the goal is to maximize steady-state efficiency, financial reforms should be accompanied by measures to increase financial capital mobility.

Suggested Citation

  • Antonio Antunes & Tiago Cavalcanti & Anne Villamil, 2006. "The Effect of Financial Repression & Enforcement on Entrepreneurship and Economic Development," Development Economics Working Papers 21816, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:develo:21816
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    Cited by:

    1. repec:red:issued:16-56 is not listed on IDEAS
    2. Justin Yifu Lin & David Rosenblatt, 2012. "Shifting patterns of economic growth and rethinking development," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 15(3), pages 171-194, September.
    3. Antunes, António & Cavalcanti, Tiago & Villamil, Anne, 2008. "Computing general equilibrium models with occupational choice and financial frictions," Journal of Mathematical Economics, Elsevier, vol. 44(7-8), pages 553-568, July.
    4. Erwan Quintin, 2008. "Contract enforcement and the size of the informal economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 37(3), pages 395-416, December.
    5. Cesar Tamayo, . "Bankruptcy Choice with Endogenous Financial Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    6. Tiago V. de V. Cavalcanti & Anne P. Villamil, 2005. "On The Welfare And Distributional Implications Of Intermediation Costs," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33rd Brazilian Economics Meeting] 087, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    7. Costas Azariadis & Leo Kaas, 2007. "Is dynamic general equilibrium a theory of everything?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 32(1), pages 13-41, July.

    More about this item

    Keywords

    Fianncial frictions; Financial Reform; occupational choice; development;

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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