Josef Falkinger (University of Zurich) – Explaining structural change towards and within the financial sector

This paper presents a 3x3 general equilibrium model of an OLG-economy with technological uncertainty, heterogeneous agents and quasi-homothetic preferences to analyze structural change between the real and the financial sector as well as within the financial sector. Besides the consumption and investment good two types of financial services are produced. The three factors of production are: Capital, skilled and unskilled labor. Financial services are needed for transforming savings into future consumption possibilities. The financial market provides deposits and an incomplete set of securities. Payoffs of assets are determined by the future profitability of the technologies in which they are invested. We show the channels through which structural change and inequality reinforce each other and show how they simultaneously emerge from rising per-capita income, an increase in skill supply and technical change.