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Finance Thy Growth: The Role of Occupational Choice By Ability-Heterogeneous Agents

  • Neville N. Jiang


    (Department of Economics, Vanderbilt University)

  • Ping Wang


    (Department of Economics, Vanderbilt University, NBER)

  • Haibin Wu

    (University of Alberta)

This paper develops an overlapping-generations model of finance and growth with intrinsic heterogeneity in loanable fund conversion ability, where agents make occupational choice between becoming entrepreneurs and becoming workers. For a given ability distribution, a decrease in the number of entrepreneurs may create an occupational choice effect, enhancing the rate of growth of the economy, as the average conversion ability of the remaining entrepreneurs is higher. A change in ability distribution parameters may generate a permanent growth effect. Due to the presence of an occupational choice effect, a scale effect and general-equilibrium wage adjustments, however, financial market thickness and income growth need not be positively correlated, in response to such distribution shifts. While both a reduction in the unit financial operation cost and an improvement in manufacturing productivity are growth enhancing, they have different effects on equilibrium prices and financial markup.

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File Function: Revised version, 2003
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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0228.

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Date of creation: Apr 2002
Date of revision: Oct 2003
Handle: RePEc:van:wpaper:0228
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