ON FINANCE AS A THEORY OF TFP,CROSS‐INDUSTRY PRODUCTIVITY DIFFERENCES,AND ECONOMIC RENTS* |
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| Authors: | Andrés Erosa Ana Hidalgo Cabrillana |
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| Institution: | 1. University of Toronto, Canada;2. Universidad Carlos III, Spain;3. Joel Blit provided superb research assistance. We thank Belén Jerez, Boyan Jovanovic, Diego Restuccia, Edward C. Prescott, José Vicente Rodríguez‐Mora, Luisa Fuster, and Matt Mitchell for helpful discussions. We owe special thanks to Ig Horstmann, Tatyana Koreshkova, and an anonymous referee, whose comments led to substantial revisions of the article. Erosa acknowledges the support of the Institute of Policy Analysis at the University of Toronto and the Social Sciences and Humanities Research Council of Canada. Hidalgo acknowledges financial support from SEJ2004‐00968 ECON project of the Spanish MEC. Please address correspondence to: Andrés Erosa, Department of Economics, University of Toronto, 150 St. George Street, Toronto, ON, M5S 3G7, Canada. Phone: 416‐978‐1840. E‐mail: . |
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| Abstract: | We develop a theory of capital‐market imperfections to study how the ability to enforce contracts affects resource allocation across entrepreneurs of different productivities, and across industries with different needs for external financing. The theory implies that countries with a poor ability to enforce contracts are characterized by the use of inefficient technologies, low aggregate TFP, large differences in labor productivity across industries, and large employment shares in industries with low productivity. These implications are supported by the empirical evidence. The theory also suggests that entrepreneurs have a vested interest in maintaining a status quo with low enforcement. |
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