Credit Constraints, Entrepreneurial Talent, and Economic Development

In this paper, we formalize the view that economic development requires high rates of productive entrepreneurship, and this requires an e¢ cient matching between entrepreneurial talent and production technologies. We …rst explore the role of …nancial development in promoting such e¢ cient allocation of talent, which results in higher production, job creation and social mobility. We then show how di¤er- ent levels of …nancial development may endogenously arise in a setting in which …nancial constraints depend on individual incentives to mis- behave, these incentives depend on how many jobs are available, and this in turn depends on the level of …nancial development. Such com- plementarity between labor market and …nancial market development may generate highly divergent development paths even for countries with very similar initial conditions.