Financial Intermediation and Occupational Choice in Development

Andres Erosa ()

Review of Economic Dynamics, 2001, vol. 4, issue 2, pages 303-334

Abstract: This paper presents evidence that the spread between the marginal product of capital and the return on financial assets is mich higher in poor than in rich countries. A model with costly intermediation is developed. In this economy, individuals choose at each instant whether to work or to operate a technology. Entrepreneurs finance their business with their own savings and, if necessary, by borrowing from banks. I find that in this framework intermediation costs are not equivalent to a tax on the return of capital. The equivalence fails because costly intermediation not only affects the capital accumulation decision but also the occupational choice decision. I show that intermediation costs have important effects on per capita output and average business size in the economy. I conclude that taxing financial intermediaries can be a very bad policy for development (Copyright: Elsevier)

JEL-codes: E20 E60 O11 O16 (search for similar items in EconPapers)
Date: 2001
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