Working Paper: NBER ID: w10236
Authors: Raymond Fisman; Inessa Love
Abstract: We analyze the relationship between financial development and inter-industry resource allocation in the short- and long-run. We suggest that in the long-run, economies with high rates of financial development will devote relatively more resources to industries with a 'natural' reliance on outside finance due to a comparative advantage in these industries. By contrast, in the short-run we argue that financial development facilitates the reallocation of resources to industries with good growth opportunities, regardless of their reliance on outside finance. To test these predictions, we use a measure of industry-level 'technological' financial dependence based on the earlier work of Rajan and Zingales (1998), and develop new proxies for shocks to (short run) industry growth opportunities. We find differential effects of these measures on industry growth and composition in countries with different levels of financial development. We obtain results that are consistent with financially developed economies specializing in 'financially dependent' industries in the long-run, and allocating resources to industries with high growth opportunities in the short-run.
Keywords: financial development; resource allocation; economic growth
JEL Codes: G10; O15; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial Development (O16) | Resource Allocation to High Growth Potential Industries (Short Run) (O25) |
| Financial Development (O16) | Specialization in Industries Requiring External Financing (Long Run) (G29) |
| Financial Dependence (G59) | Sector Shares (D33) |
| Financial Dependence (G59) | Growth (O00) |