Abstract
The recent decades have witnessed upstream financial flows and rising intangible investment. Given heterogeneous pledgeability, we find that financial inflows have opposite short-run and long-run effects on intangible–tangible investment composition and the efficiency of capital formation. By reducing the investment elasticity along the extensive margin, rising wealth inequality undermines the efficiency gains from financial inflows. Similarly, market frictions and policy distortions that hinder entrepreneurship may also reduce the investment elasticity. Thus, our mechanism offers a new perspective for understanding cross-country differences in intangible–tangible investment composition.
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