The joint determination of TFP and Financial Sector Size

Christian Bauer, Sevi Rodriguez Mora

Research output: Working paper


We present a model of heterogeneous firms and misallocation where
financial frictions are partially overcome if more human resources are
devoted to intermediation, at the cost of having less resources employed
in directly productive activities.

Exogenous inefficiencies in the productive sector generate decreased
demand for financial services, translating in a smaller financial sector,
which in turn generates even worse resource allocation in the productive
sector. This novel direction of causality seems in line with cross{country
evidence. Thus, differences between rich and poor countries seem to lie
more prominently on structural differences in their productive sectors,
not in their financial ones.
Original languageEnglish
Publication statusPublished - 6 Feb 2014


  • credit search
  • endogenous financial intermediation,
  • inter-action of product and credit market inefficiency


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