TY - JOUR AU - Buera, Francisco J AU - Kaboski, Joseph AU - Shin, Yongseok TI - Finance and Development: A Tale of Two Sectors JF - National Bureau of Economic Research Working Paper Series VL - No. 14914 PY - 2009 Y2 - April 2009 DO - 10.3386/w14914 UR - http://www.nber.org/papers/w14914 L1 - http://www.nber.org/papers/w14914.pdf N1 - Author contact info: Francisco J. Buera Department of Economics Washington University in St. Louis One Brookings Drive St. Louis, MO 63130 Tel: 314/935-5648 E-Mail: fjbuera@wustl.edu Joseph P. Kaboski Department of Economics University of Notre Dame 3039 Nanovic Hall Notre Dame, IN 46556 Tel: 574/631-9906 E-Mail: jkaboski@nd.edu Yongseok Shin Department of Economics Washington University in St. Louis One Brookings Drive St. Louis, MO 63130 Tel: 314/935-7138 Fax: 314/935-4156 E-Mail: yshin@wustl.edu AB - Income differences across countries primarily reflect differences in total factor productivity (TFP). More disaggregated data show that the TFP gap between rich and poor countries varies systematically across industrial sectors of the economy: Poor countries are particularly unproductive in tradable and investment goods sectors. In this paper, we develop a quantitatively-oriented framework to explain such cross-country patterns in aggregate and sectoral TFP. We start by documenting that an important distinction between sectors is their average establishment size. For example, establishments in tradable and investment goods sectors operate at much larger scales than those in the non-tradable sector. In our model, sectors with larger scales of operation have more financing needs, and are hence disproportionately affected by financial frictions. Our quantitative exercises show that financial frictions account for a substantial part of the observed cross-country patterns in TFP, both at the aggregate and at the sectoral level. Our model also has novel implications for the impact of financial frictions on the relative scale between the tradable and the non-tradable sectors, which are shown to be consistent with the data. ER -