Potential entrepreneurs require capital for investment in projects. They are differentiated by wealth and face credit constraints. Agents with little wealth are unable to fund their projects, those with intermediate levels of wealth can fund inefficiently sized projects and only wealthy entrepreneurs can attain the efficient firm size. We examine the determinants of economic efficiency in this setting as well as the effects of wealth redistribution. We find that these effects depend on the aggregate wealth of the economy. Next, we consider agents that can be either workers or entrepreneurs, and firms that can fail and reproduce the main results. We study the consequences of special preference for workers in bankruptcy and show that it leads to conflicting interests between workers in large and small firms. Similarly, the interests of small and large entrepreneurs differ with respect to improvements in the financial system.
JEL: G28, O15.
Keywords: efficiency., Financial development, wealth and firm size distribution