Credit constraints and taxes: misallocation in a two-sector economy

Julia Passabom Araujo ()

No 2016_19, Working Papers, Department of Economics from University of São Paulo (FEA-USP)

Abstract: Effects of misallocation in a two sector economy with different capital intensity technologies can be particularly large. This article proposes a model of occupational choice based on wealth and entrepreneurial talent in which individuals are subject to credit constraints and different tax-rates. Agents must choose between opening a business in a more, or less, capital intensive sector or being a wage worker. The model is calibrated to the Brazilian economy between 2000-2013. Regarding the effects of financial frictions, limiting credit availability to a less capital intensive sector can be worse in terms of efficiency, but less distortive in terms of income inequality. Taxation over a more capital intensive sector worsens aggregate productivity, although it can improve income distribution. Taxing wage workers have a lower impact on efficiency, but will be severely worse on equality.

Keywords: Capital intensity; credit frictions; taxation; entrepreneurship; misallocation (search for similar items in EconPapers)
JEL-codes: L26 O11 O14 O41 (search for similar items in EconPapers)
Date: 2016-10-14
New Economics Papers: this item is included in nep-ent
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