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Financial Frictions, Occupational Choice, and Economic Inequality

Author

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  • Andres Erosa

    (IMDEA)

  • Lian Allub

    (Universidad Carlos III de Madrid)

Abstract

We develop a quantitative life-cycle theory of occupational choice decisions, economic inequality, and financial frictions. The model is calibrated to life-cycle evidence on occupational choices and their persistence, earnings inequality, and consumption inequality in the Brazilian data. An important novelty of our theory is that individuals are heterogeneous in two ability types - ability as a worker and ability as an entrepreneur. Depending on their comparative advantage at occupations (ratio of abilities) and wealth, individuals may choose to become workers or entrepreneurs. The correlation of these two abilities is important for the quantitative implications of the theory because it determines the extent to which talented entrepreneurs are able to self-finance their businesses. When the correlation between skills is high, individuals that are talented as entrepreneurs are also talented as workers. Then, if skills are also persistent over time, young and talented individuals can work when young, build savings, and use their savings to finance their businesses when old. Thus, when entrepreneurial and working skills are highly correlated and persistent over time, the effects of financial frictions on resource allocations are less important than otherwise. Through counterfactual exercises, we want to study how alternative ways of generating economic inequality matter for the effects of financial frictions in the economy. We expect these results to deepen our understanding of the (non-trivial) interactions between inequality, financial frictions, and economic development.

Suggested Citation

  • Andres Erosa & Lian Allub, 2012. "Financial Frictions, Occupational Choice, and Economic Inequality," 2012 Meeting Papers 702, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:702
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    References listed on IDEAS

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    Cited by:

    1. Bettina Brueggemann, 2016. "Higher Taxes at the Top: The Role of Entrepreneurs," 2016 Meeting Papers 332, Society for Economic Dynamics.
    2. Roberto Ramos & Manuel García-Santana & Jose Asturias, 2014. "Misallocation, Internal Trade, and the Role of Transportation Infrastructure," 2014 Meeting Papers 1035, Society for Economic Dynamics.
    3. Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2010. "Financing Development: The Role of Information Costs," American Economic Review, American Economic Association, vol. 100(4), pages 1875-1891, September.
    4. Francisco J. Buera & Joseph P. Kaboski & Yongseok Shin, 2015. "Entrepreneurship and Financial Frictions: A Macrodevelopment Perspective," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 409-436, August.
    5. Kevin Donovan, 2014. "Subsistence Entrepreneurs and Misallocation," 2014 Meeting Papers 771, Society for Economic Dynamics.
    6. Sang Yoon (Tim) Lee, 2019. "Entrepreneurs, managers and inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 42-67, April.
    7. Inés Butler & Gabriela Galassi & Hernán Ruffo, 2016. "Public funding for startups in Argentina: an impact evaluation," Small Business Economics, Springer, vol. 46(2), pages 295-309, February.
    8. Tanida Arayavechkit & Somprawin Manprasert & Jaree Pinthong, 2015. "Intertwining Inequality and Labor Market under the New Normal," PIER Discussion Papers 6., Puey Ungphakorn Institute for Economic Research, revised Oct 2015.
    9. Merlin, Giovanni Tondin, 2018. "Entrepreneurship, financial frictions and the welfare gains of business cycles," Textos para discussão 484, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    10. Hill, Enoch & Perez-Reyna, David, 2017. "Financial development and occupational choice," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 393-409.
    11. Sang Yoon (Tim) Lee, 2019. "Entrepreneurs, managers and inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 32, pages 42-67, April.

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