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LIMITED ENFORCEMENT, FINANCIAL INTERMEDIATION, AND ECONOMIC DEVELOPMENT: A QUANTITATIVE ASSESSMENT*

Authors

  • Pedro S. Amaral,

    1. Federal Reserve Bank of Cleveland, U.S.A. Federal Reserve Bank of Dallas, U.S.A.
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  • Erwan Quintin

    1. Federal Reserve Bank of Cleveland, U.S.A. Federal Reserve Bank of Dallas, U.S.A.
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    • 1

      We thank Rui Castro, Berthold Herrendorf, Tim Kehoe, Ed Prescott, Richard Rogerson, and two referees for their comments, as well as seminar participants at the Annual Meeting of the Society for Economic Dynamics, Arizona State University, the Federal Reserve Bank of Minneapolis, the Latin American Meetings of the Econometric Society, Queen's University, Texas A&M, the Universidad Católica Argentina, the Universidad de Guanajuato, the University of Pittsburgh, the University of Texas-Austin, and the University of Western Ontario. The views expressed herein are those of the authors and may not reflect the views of the Federal Reserve Bank of Cleveland, the Federal Reserve Bank of Dallas, or the Federal Reserve System. Please address correspondence to: Pedro S. Amaral, Research Department, Federal Reserve Bank of Cleveland, P.O. Box 6387, Cleveland, OH 44101-1387, Phone: (216) 206-3668. Fax: (216) 579-3050. E-mail: pedro.amaral@clev.frb.org.


  • *

    Manuscript received February 2008; revised September 2008.

Abstract

We present a model of economic development where the importance of financial differences caused by limited enforcement can be measured. Economies where enforcement is poor direct less capital to the production sector and employ less efficient technologies. Calibrated simulations reveal that the resulting effect on output is large. Furthermore, the model correctly predicts that the average scale of production should rise with the quality of enforcement. Finally, we find that the importance of limited enforcement rises with the importance of capital in production.

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