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Distortions, misallocation and the endogenous determination of the size of the financial sector

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Original languageEnglish
JournalEconomic Journal
Publication statusAccepted/In press - 6 Oct 2018


We present a model of heterogeneous firms and misallocation where financial frictionsare partially overcome if more human resources are devoted to intermediation, at the cost of having less resources employed in directly productive activities. Not only an inefficient financial sector results in an inefficient final good sector, but also an inefficient final good sector results in an inefficient financial sector. Exogenous inefficiencies in the productive sector generate decreased demand for financial services, translating in a smaller and less efficient financial sector, worsening the resource allocation in the productive sector. This direction of causality seems in line with cross{country evidence.

    Research areas

  • misallocation, credit search frictions, interaction of product and credit market efficiency

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