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LIMITED ENFORCEMENT, FINANCIAL INTERMEDIATION, AND ECONOMIC DEVELOPMENT: A QUANTITATIVE ASSESSMENT *
Author(s) -
Amaral Pedro S.,
Quintin Erwan
Publication year - 2010
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.1468-2354.2010.00601.x
Subject(s) - enforcement , intermediation , production (economics) , financial intermediary , capital (architecture) , economics , scale (ratio) , quality (philosophy) , business , finance , macroeconomics , history , philosophy , physics , archaeology , epistemology , quantum mechanics , political science , law
We present a model of economic development where the importance of financial differences caused by limited enforcement can be measured. Economies where enforcement is poor direct less capital to the production sector and employ less efficient technologies. Calibrated simulations reveal that the resulting effect on output is large. Furthermore, the model correctly predicts that the average scale of production should rise with the quality of enforcement. Finally, we find that the importance of limited enforcement rises with the importance of capital in production.