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Financial Intermediation and Occupational Choice in Development
Institution:1. Computer Science and Information Technology, Armstrong State University, Savannah GA, USA;2. Georgia Southern University, Statesboro GA, USA
Abstract:This paper presents evidence that the spread between the marginal product of capital and the return on financial assets is much higher in poor than in rich countries. A model with costly intermediation is developed. In this economy, individuals choose at each instant whether to work or to operate a technology. Entrepreneurs finance their business with their own savings and, if necessary, by borrowing from banks. I find that in this framework intermediation costs are not equivalent to a tax on the return of capital. The equivalence fails because costly intermediation affects not only the capital accumulation decision but also the occupational choice decision. I show that intermediation costs have important effects on per capita output and average business size in the economy. I conclude that taxing financial intermediaries can be a very bad policy for development. Journal of Economic Literature Classification Numbers: E20, E60, O11, O16.
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