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Financial Frictions, Occupational Choice and Economic Inequality

Lian Allub and Andres Erosa

No 1024, Research Department working papers from CAF Development Bank Of Latinamerica

Abstract: We develop a quantitative theory of entrepreneurship, income inequality, and financial frictions disciplined with household data from Brazil. The theory extends Lucas (1978) by modeling heterogeneity in two skills: -working and managerial skills. Consistently with the evidence, the theory implies three occupational categories: workers, employers, and self-employed entrepreneurs. We find that the correlation between working and managerial skills matters importantly for the distribution of earnings across occupations and for the quantitative implications of financial frictions. We also find that while most households benefit from a reform that eliminates enforcement problems, the majority of employers (about two thirds) lose from the reform. By depressing the demand for labor, limited enforcement depresses the equilibrium wage rate, increasing the profits of employers. Our theory thus suggests that employers in Brazil may have a vested interested in maintaining a status quo with low enforcement.

Keywords: Economía; Investigación socioeconómica (search for similar items in EconPapers)
Date: 2012
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https://scioteca.caf.com/handle/123456789/1024

Related works:
Journal Article: Financial frictions, occupational choice and economic inequality (2019) Downloads
Working Paper: Financial frictions, occupational choice and economic inequality (2014) Downloads
Working Paper: Financial Frictions, Occupational Choice, and Economic Inequality (2012) Downloads
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