Abstract
During the last three decades Western economies have been characterized by an increasing role played by the financial sector. This process, called financialization, has been associated with lower economic growth, increased inequality and declining financial stability. In this article I develop a simple framework to study the effects of financialization on aggregate growth and systemic risk. The main driver of this mechanism is the bargaining power of intermediaries. Indeed, financial institutions, by absorbing a larger quota of income from their borrowers, can reduce the incentive for new entrepreneurs to enter in the market. Because of that, both the long-term potential growth rate and the overall stability of the system can be negatively affected by an overdeveloped financial sector.
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