Jaimovich, E.; (2008) Three essays on financial development, inequality, and growth. Doctoral thesis , University of London.

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Abstract

This thesis presents three papers that to contribute to our theoretical knowledge on economic growth and secular stagnation. Chapter 2 (which constituted my Job Market paper) presents a theory in which economic development manifests itself primarily as a process of sectoral differentiation. As the variety of sectors expands, the allocation of heterogeneously talented individuals improves. The paper shows that, in addition to increasing the average productivity of the matches between agents and sectors, this process also mitigates informational frictions affecting the functioning of financial markets. The positive impact of sectoral variety on the efficiency of financial markets gives rise to a novel feedback between financial development and horizontal innovations, which may yield different types of dynamics. A successful economy typically exhibits a continuous increase in the variety of productive activities, which in turn leads to lower frictions in the financial markets. However, a poverty-trap may also arise. This situation is characterised by a rudimentary productive structure with poor matching of skills to activities, and where the operation of financial markets is severely affected by the talent mismatching. Chapter 3 proposes a theory of insurance market imperfections along the path of development based on the endogenous emergence of informational asymmetries during development. The source of the in efficiency in the insurance market is private information regarding entrepreneurial skills. Development is driven by the action of the entrepreneurs, and materialises when the agents best suited for under taking entrepreneurial activities fully exercise their skills. Yet, due to private information, an adverse selection problem endogenously arises when the prospective entrepreneurs intend to diversify away their idiosyncratic risks. The adverse selection problem prevents the provision of first-best insurance contracts against entrepreneurial risks, which may discourage entrepreneurial investment and halt, the process of development. Chapter 4 (written in collaboration with Vincenzo Merella, from Birkbeck College) turns the attention towards a world economy. The past literature on trade has explored conditions under which international trade might be a factor magnifying income disparities between the advanced North and the backward South. No attention has yet been placed on the effect of trade on countries that do not display substantial dissimilarities concerning capital endowments and income per head. The paper shows that even when no single country is technologically more advanced than any other one and productivity changes are uniform and identical in all countries, international trade may still be the source of income divergence. Divergence will be experienced when comparative advantages induce patterns of specialisation that, although optimal for each country at some initial point in time, do not offer the same scope for improvements in terms of subsequent quality upgrading of final products.

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