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ON FINANCE AS A THEORY OF TFP, CROSS‐INDUSTRY PRODUCTIVITY DIFFERENCES, AND ECONOMIC RENTS *
Author(s) -
Erosa Andrés,
Hidalgo Cabrillana Ana
Publication year - 2008
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2008.00486.x
Subject(s) - economic rent , productivity , economics , total factor productivity , status quo , enforcement , capital (architecture) , labour economics , monetary economics , microeconomics , macroeconomics , market economy , history , archaeology , political science , law
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.