Misalloction of Talents, Financial Intermediation, and Growth

Abstract

This paper extends a two-period, three sectors overlapping generations' model of endogenous growth where the interactions between financial constraints, innovation and labor supply are studied. The solutions of the model emphasize the important role financial constraints on innovation (induced by high intermediation costs) can play in reducing the economy's growth performance. Inadequate access to finance has adversely affected the investment in knowledge creation activities. The finding also shows that lack of highly educated labor impedes innovation activities not only directly, but also indirectly by altering incentives to undergo training to acquire specialized skills.