Financial Intermediation and TFP Differences

Countries differ markedly with respect to income per capita. These differences cannot be accounted for by differences in factors of production, which means that measured TFP varies significantly across countries. Countries that have a poorly developed financial intermediation sector tend to be poorer and have a lower TFP. We develop a theory of TFP based on the efficiency of the financial intermediation sector, where entrepreneurs that require funds to finance their establishments are subject to an endogenous borrowing constraint. We then compare model economies calibrated to replicate real world economies with varying degrees of financial intermediation, from which we can draw quantitative implications. Such experiments can account for roughly a factor of 2 in the variation of TFP