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The allocation of talent: finance versus entrepreneurship

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  • Shakhnov, Kirill

Abstract

The rapid growth of the US financial sector has driven policy debate on whether it is socially desirable. I propose a heterogeneous agent model with asymmetric information and matching frictions that produces a tradeoff between finance and entrepreneurship. By becoming bankers, talented individuals efficiently match investors with entrepreneurs, but do not internalize the negative effect on the pool of talented entrepreneurs. Thus, the financial sector is inefficiently large in equilibrium, and this inefficiency increases with wealth inequality. The model explains the simultaneous growth of wealth inequality and finance in the US, and why more unequal countries have larger financial sectors.

Suggested Citation

  • Shakhnov, Kirill, 2014. "The allocation of talent: finance versus entrepreneurship," Economics Working Papers ECO2014/13, European University Institute.
  • Handle: RePEc:eui:euiwps:eco2014/13
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    References listed on IDEAS

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    Cited by:

    1. Facundo Albornoz & Antonio Cabrales & Esther Hauk, 2017. "Occupational Choice with Endogenous Spillovers," Working Papers 972, Barcelona Graduate School of Economics.
    2. Pablo Kurlat, 2016. "The Social Value of Financial Expertise," NBER Working Papers 22047, National Bureau of Economic Research, Inc.
    3. Pablo Kurlat, 2017. "The Social Value of Financial Expertise," 2017 Meeting Papers 134, Society for Economic Dynamics.
    4. Khabibulina, Liliya & Hefti, Andreas, 2015. "Talent Allocation, Financial Intermediation and Growth: Evidence and Theory," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113095, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    Talent; Financial sector; Matching; Productivity;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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