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Sectoral Differentiation, Allocation of Talent, and Financial Development

Esteban Jaimovich ()

No 59, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: I present a theory of development in which heterogeneously talented entrepreneurs require credit to start new projects and open new sectors. As the variety of sectors expands during development, the allocation of entrepreneurial talent improves. A key result of the paper is to show that, in addition to increasing the average productivity of the matches between agents and sectors, this process also mitigates informational frictions affecting the functioning of financial markets. Furthermore, the positive impact of sectoral variety on the efficiency of financial markets gives rise to a novel feedback between financial development and R&D effort, which may lead to different types of dynamics. A successful economy typically exhibits a progressive increase in the variety of sectors, which in turn helps to alleviate frictions in the financial markets. However, a poverty trap may also arise. This situation is characterised by a rudimentary productive structure with poor matching of skills to activities, and where the operation of financial markets is severely affected by talent mismatching.

Keywords: Adverse Selection; Informational Frictions; Talent Allocation; Sectoral Diversification; Financial Development. (search for similar items in EconPapers)
JEL-codes: D82 O12 O14 O16 O30 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2007, Revised 2009
References: View references in EconPapers View complete reference list from CitEc
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Journal Article: Sectoral differentiation, allocation of talent, and financial development (2011) Downloads
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