Research Report, Department of Economics, University of Western Ontario 2000-3
This paper presents evidence that the spread between the marginal product of capital and the return on financial assets is mich higher in poor than in rich countries. A model with costly intermediation is developed. In this economy, individuals choose at each instant whether to work or to operate a technology. Entrepreneurs finance their business with their own savings and, if necessary, by borrowing from banks. I find that in this framework intermediation costs are not equivalent to a tax on the return of capital. The equivalence fails because costly intermediation not only affects the capital accumulation decision but also the occupational choice decision. I show that intermediation costs have important effects on per capita output and average business size in the economy. I conclude that taxing financial intermediaries can be a very bad policy for development.