Implicit in this discussion is another problem<sup>whichhasnoobviousremedyhere, giventhemodel.</sup> Although households in the model maximize end-of-period<sup>wealth,they pass on a fraction of that wealth</sup> to their heirs. Thus the end-of-period wealth<sup>effectsof theliberalizationarepassedontosubsequent</sup> generations. The problem is that there is no<sup>obvioussummarydevice-</sup> households do not maximize discounted expected utility, as in Greenwood and<sup>Jovanovic(1990)andtheanalysisofTownsendand</sup> Ueda (2001), for example. Here then we do not attempt<sup>to circumventthe problembutratherpresent</sup> the more static welfare analysis for various separate<sup>periods.Arelatedissue isthe difficultyof weighting</sup> welfare changes by the endogenous and evolving distributions<sup>of wealthinthe two economies-seebelow</sup> for more specifics on that.

We take a look first at the liberalized economy<sup>in1979,threeyearsafterthe1976initialstartup,</sup> using the overall best fit Townsend-Thai data<sup>economywithliberalization.Asnotedearlier,the wage</sup> has not yet increased as a result of the liberalization.<sup>Its valueis .0198inthe liberalizedandrestricted</sup> benchmark economies. The interest rate in the intermediated<sup>sector of theliberalizedeconomyisvery</sup> high, at 93 percent. This reflects the high marginal<sup>productof capitalinaneconomywitha relatively</sup> low distribution of wealth.

Figure 7b in page 44 displays the corresponding occupation<sup>partition,butnowdenotingfor given</sup> beginning-of-period _(b,_ x) combinations the corresponding<sup>occupationofahouseholdintheno-credit</sup> economy and in the credit sector of the intermediated<sup>economy.The darkershadesof Figure7bdenote</sup> households with _(b, x)_ combinations who do not<sup>changetheiroccupationasa resultof the liberalization,</sup> that is, they are entrepreneurs (E) in the no-credit<sup>(NC)economyandintheintermediatedsectorof</sup> the liberalized (C) economy, or workers (W) in both<sup>instances.The lightshades denotehouseholds who</sup> switch: low wealth but low cost agents who were<sup>workersbecomeentrepreneurs,andhigh wealth,high</sup> cost agents who were entrepreneurs become workers.<sup>The picture is the overlap of the occupationalmaps</sup> in both sectors. For the credit sector, the key parameter<sup>is z, whereasforthe no-creditsector,it isthe</sup> curve _xe(b, wo)._ Figure 7a in page 44 displays the corresponding end-of-period<sup>wealthpercentagechangesin the same</sup> _(b, x)_ space. Since the wage is the same in both<sup>sectors, agentswillonlybenefitfrombeing inthe</sup> credit sector, not only because they can freely borrow<sup>attheprevailingrateif theydecidetobecome</sup> entrepreneurs, but because they can deposit their wealth<sup>and earn interestonit.The wealthgain due to</sup> interest rate earnings can be best seen by fixing x and<sup>moving alongthe</sup><sup>_b_axis,notingtherise.</sup> If on the other hand we look at the highest wealth,<sup>b = 0.5 edge,we cantrack the wealth changesthat</sup> correspond to changing set up costs x. Going<sup>from therearof the diagram,athighz,we seethat the</sup> wealth increment is constant, but these households<sup>wereworkersin both economies,so set upcosts xare</sup> never incurred. Then the wealth increment drops -these<sup>householdswereentrepreneursin the no-credit</sup> economy and were investing some of their wealth in<sup>the setupcosts x- those withhighxgain themost,</sup> quitting that investment and becoming workers in the<sup>intermediatedsector.Thus the percentagewealth</sup> increment drops as x decreases. One reaches a trough,<sup>however,whenthehouseholddecidesto remain</sup> an entrepreneur. Yet lower set up costs benefit entrepreneurs<sup>inthe intermediatedsectormorethanin</sup> the corresponding no-credit economy, because the<sup>residualfunds canbeinvestedatinterest.Hence,the</sup> back edge rises up as x decreases further.

The most dramatic welfare gains, however,<sup>are</sup> experienced<sup>bythoseagentswhoarecompelledto</sup> be workers in the no-credit economy but become entrepreneurs<sup>in theintermediatedsector.Although</sup> their setup cost was relatively low, their wealth<sup>wasnotenoughtofinanceit.They were constrainedon</sup> 20