Journal
AMERICAN ECONOMIC REVIEW
Volume 101, Issue 5, Pages 1964-2002Publisher
AMER ECONOMIC ASSOC
DOI: 10.1257/aer.101.5.1964
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Funding
- Direct For Social, Behav & Economic Scie
- Divn Of Social and Economic Sciences [0946647] Funding Source: National Science Foundation
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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. (JEL E23, E44, O41, O47)
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