تمایز بخشی، تخصیص استعداد و توسعه مالی

I present a theory of development in which heterogeneously talented entrepreneurs require credit to start new projects and open new sectors. During development the variety of sectors expands, which allows better sorting of entrepreneurial talent. The paper shows that, in addition to increasing the average productivity of matches between agents and sectors, this process also mitigates informational frictions in the financial markets. Furthermore, the impact of sectoral variety on the operation of financial markets gives rise to an interesting feedback between financial development and R&D effort, which may lead to different types of dynamics. A successful economy exhibits a progressive increase in the variety of sectors, which in turn enhances the operation of 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 severely inefficient credit to talented entrepreneurs.

Over the course of development, the variety of productive activities in the economy tends to increase in conjunction with the aggregate stock of capital and output. This observation implies that economic development manifests itself partly as a process of sectoral diversification and increasing specialisation within the economy, an idea that dates back to Adam Smith (1776) in his discussion of the division of labour and its relation with the size of the market (The Wealth of Nations, chapter 3). Such a dynamic pattern is also described by Allyn Young (1928, p. 537), who writes that “industrial differentiation has been and remains the type of change characteristically associated with the growth of production.” Similarly, Landes (1969, p. 5) argues that the most evident effects brought about by the Industrial Revolution were the gains in productivity and the increase in the variety of products and occupations. I propose a theory in which this process of sectoral diversification helps to mitigate informational frictions affecting the operation of financial markets. Furthermore, the degree of sectoral variety is itself endogenous to the theory, and it is positively influenced by financial markets. As a result, sectoral differentiation and the operation of financial markets appear interrelated in the model, and this positive interaction becomes a key feature that shapes the patterns of development followed by different economies.

This paper has proposed a theory in which the efficiency of financial markets is a key condition for growth and development. I have suggested that an expanding variety of sectors may be an important factor leading to financial development. In particular, this theory has stressed a side effect associated with the innovation process that had not been explored before, but which could exert a significant impact on development. Innovation activities can lead to a reduction of frictions in the financial markets and foster financial development, because by expanding the variety of productive activities, they concomitantly facilitate the allocation of skills, and thereby alleviate adverse selection problems faced by talented entrepreneurs.