Credit Constraints, Entrepreneurial Talent, and Economic Development

International audienceIn 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