occupation choice models should allow more endogenous financial sector participation, they illustrate well as they stand the fact that there may be welfare losses for some sectors of the population, not just gains, to liberalization. This offers a political economy rational for the apparently restrictive policies that we observed in Thailand.

> Third, the imagined industrial organization of the Thai economy is relatively simple. In the model here fixed setup costs are allowed to vary across potential entrepreneurs, as if drawn from a quadratic

> cumulative distribution, but the quadratic production function mapping labor and capital into output is

> uniform across potential entrepreneurs. This delivers the occupation partition diagram and variation over time in the size distribution of firms, a function of the wage and the endogenous distribution of wealth.

> Indeed, an industrial organization literature starting with Lucas (1978) begins the same way, at least in spirit. He postulates an underlying distribution of personal managerial talent and then studies the

> division of persons into managers and employees and the allocation of productive inputs across managers. This has implications for secular changes in average firm size. This point is revisited by Gollin (1999).

> Here the distribution of size and profits among firms is driven by self-financing, an endogenous and

> evolving distribution of wealth, and differential access to credit. That is, high set up costs and limited credit can limit the use of real physical capital in the standard part of the production function or can

> impede entry entirely. Likewise, some portion of end-of period profits is passed on to subsequent time periods if not subsequent generations. This could be an explanation for some of the serial correlation in

> size, profits, and employment that is seen in actual data, even when shocks in the form of set up costs are independent and identically distributed over time and households There would be implications for the cross-sectional dispersion in growth rates. Indeed, it seems that in Thailand larger firms, and those with financial access, may have grown faster than smaller ones as the credit market expanded in the late 1980's. Recent theoretical work is beginning to readdress earlier the supposed facts of firm growth and survival in the context of endogenous limited financial contracts. See Albuquerque and Hopenhayn

> (2001) and Cooley, Marimon and Quadrini (2000)

> More generally both the industrial organization and credit market literature need to be brought together. Existing empirical work has documented relationships between investment and the balance sheet, for example, but much of this work is somewhat atheoretic, documenting that the world is not

> neoclassical but leaving us wondering what the impediments to trade really are. The general equilibrium

> models of Banerjee and Newman (1993), Piketty (1997) and Aghion and Bolton (1997) take different stands on those underpinnings but collectively make the point that growth and inequality can be related to imperfect credit markets. That of course was our starting point here.

Indeed, in related work Paulson and Townsend (2001) use the Townsend-Thai data to estimate via maximum likelihood methods not only the LEB model featured here, but also collateral based lending as in model of Evans and Jovanovic (1989) (EJ for short), for example, and also incentive-based lending as in the mechanism design literature of Aghion and Bolton (1997) and Lehnert (1998) (ABL for short). Observed relationships of entrepreneurship, investment, and access to credit as functions of wealth and talent suggest that the ABL model fits the micro Thai data best, but the EJ model fits well for those with relatively low levels of wealth and those in the Northeast, while LEB, the model here, is a close contender. This suggests that a calculation of the welfare gains and losses to financial intermediation based on these other models would be worthwhile, though the average and modal estimates here should not be rejected out of hand. It does seem plausible, however, that the dramatic gains near the wealth equal set-up costs or 45° line would be vulnerable to alternative specifications.

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