Financial frictions, occupational choice and economic inequality Articles uri icon

publication date

  • November 2019

start page

  • 63

end page

  • 76

volume

  • 107

International Standard Serial Number (ISSN)

  • 0304-3932

Electronic International Standard Serial Number (EISSN)

  • 1873-1295

abstract

  • The Lucas (1978) model is extended to incorporate heterogeneity in working ability and a time allocation decision by entrepreneurs (work versus manage). Financial frictions dis- tort not only the average skill of entrepreneurs but also the average skill of workers. The model economy accounts for half of the association between entrepreneurship and exter- nal finance to GDP in the data, whereas a standard span of control model explains only about one tenth. The variation in entrepreneurship is mostly due to the variation in self- employed entrepreneurs rather than in employers. Moreover, financial frictions have larger effects on output per worker, TFP, and inequality

keywords

  • financial frictions; entrepreneurs; employers; self-employed; tfp; inequality