Type: Working Paper
The allocation of talent : finance versus entrepreneurship
Working Paper, EUI ECO, 2014/13
SHAKHNOV, Kirill, The allocation of talent : finance versus entrepreneurship, EUI ECO, 2014/13 - http://hdl.handle.net/1814/33454
Retrieved from Cadmus, EUI Research Repository
The rapid growth of the US financial sector has driven policy debate on whether it is socially desirable. I propose a heterogeneous agent model with asymmetric information and matching frictions that produces a tradeoff between finance and entrepreneurship. By becoming bankers, talented individuals efficiently match investors with entrepreneurs, but do not internalize the negative effect on the pool of talented entrepreneurs. Thus, the financial sector is inefficiently large in equilibrium, and this inefficiency increases with wealth inequality. The model explains the simultaneous growth of wealth inequality and finance in the US, and why more unequal countries have larger financial sectors.
Cadmus permanent link: http://hdl.handle.net/1814/33454
Series/Number: EUI ECO; 2014/13