American Economic Review Vol. 101 No. 5 2011

Finance and Development: A Tale of Two Sectors

Francisco J. Buera¹; Joseph P. Kaboski²; Yongseok Shin³

¹ Department of Economics, University of California–Los Angeles, 8283 Bunche Hall, Los Angeles, CA 90095. · ² Department of Economics, University of Notre Dame, 712 Flanner Hall, Notre Dame, IN 46556. · ³ Department of Economics, Washington University in St. Louis, Saint Louis, MO 63130, and Federal Reserve Bank of St. Louis.

Abstract

We develop a quantitative framework to explain the relationship between aggregate/sector-level total factor productivity (TFP) and financial development across countries. Financial frictions distort the allocation of capital and entrepreneurial talent across production units, adversely affecting measured productivity. In our model, sectors with larger scales of operation (e.g., manufacturing) have more financing needs, and are hence disproportionately vulnerable to financial frictions. Our quantitative analysis shows that financial frictions account for a substantial part of the observed cross-country differences in output per worker, aggregate TFP, sector-level relative productivity, and capital-to-output ratios.

DOI

10.1257/aer.101.5.1964

Volume

101

Issue

5

Pages

1964-2002

Language

en

Sources

openalex bibtex:phds-export.bib crossref

Cite

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