Abstract
Financial intermediation facilitates economic development by providing entrepreneurs with external finance. The relative costs of financing depend on the relative efficiency of the financial sector and the sector using financial intermediation services, the production sector. These costs determine the occupational choices and the set of active establishments in the production and financial sectors. A model of establishment-size distributions in the production and financial sectors results. This model is calibrated to match facts about the U.S. economy, such as the interest-rate spread and the establishment-size distributions in the production and financial sectors. It is then used to evaluate the importance of the relative technological progress in the production and financial sectors and the observed decline in the real interest rate for the dynamics of the value added and average establishment size in the production and financial sectors. The model accounts for the observed positive trend in the share of value added and negative trend in the average establishment size in the U.S. and Taiwanese financial sectors during the last three decades.
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