Sectors Expansion, Allocation of Talent and Adverse Selection in Development

Esteban Jaimovich

DEGIT Conference Papers from DEGIT, Dynamics, Economic Growth, and International Trade

Abstract: 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.

Keywords: Horizontal Innovation; Talent Allocation; Adverse Selection; Risk-Sharing (search for similar items in EconPapers)
Pages: 38 pages JEL Classification: O10, O16, O31, D82
Date: 2006-06
New Economics Papers: this item is included in nep-dev
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