The Allocation OF Talent: Finance versus Entrepreneurship

No 420, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: The rapid growth of US financial services coupled with rapid increases in wealth inequality have been focusing policy debate as to the function of the financial sector and on its social desirability as a whole. I propose a heterogeneous agent model with asymmetric information and matching frictions that produces a tradeoff between finance and entrepreneurship. By becoming bankers, talented agents efficiently match investors with entrepreneurs, but extract excessive informational rents due to contract incompleteness. Thus the financial sector is inefficiently large in equilibrium, and this inefficiency increases with wealth inequality. The estimated model accounts for the simultaneous growth of wealth inequality and the financial sector in the US. The endogenous feedback between inequality and the size of the financial sector is quantitatively important.

JEL-codes: E24 E44 G14 L26 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2020-12
New Economics Papers: this item is included in nep-cta, nep-dge, nep-ent, nep-fdg and nep-mac
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: The Allocation of Talent: Finance versus Entrepreneurship (2022)
Working Paper: The allocation of talent: finance versus entrepreneurship (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0420

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