A prediction of the model<sup>thatcould seeminglybecheckedinthe dataconcernsrates of returnto</sup> capital. One might suppose<sup>thatwithlimitedcredittherateof returnto capitalwould be high.Thisis</sup> true for some firms in the<sup>simulations.However,for otherfirmswithoutaccessto intermediation,wealth</sup> cannot be lent at interest<sup>andisthusinvestedinternallyatlowrates of return.Thus theimplicationof</sup> the model is unclear about<sup>the mean,averagerate of return to capitaland only asserts that the dispersion</sup> of rates of return is higher<sup>forfirmswithoutaccessrelativeto those who canborrowandlend.</sup>

# 11 Conclusions

From the welfare numbers<sup>presented,there seems to be a lot at stake in credit liberalizations. Even by our</sup> most conservative estimates<sup>thereis agroupof lowwealthtalentedhouseholdswhohave muchtogain,</sup> period by period, in income<sup>and wealth.On the other hand,the estimatesreveal a group of entrepreneurs</sup> who have much to lose, period<sup>byperiod,inincomeandwealth,particularly ifonetakesintoaccount</sup> the growth in wages. We<sup>do notpush hereanyparticular anynumberas the mostcompelling,because</sup> the numbers do vary and<sup>do dependon the datasetused.Indeed,the largerpointisthatwelfaregains</sup> and losses are sensitive to<sup>thepresumed,estimatedmicrounderpinningsof theeconomy.If therewere</sup> more substantial intermediation,<sup>then variationsassociatedwith further liberalizationwould matterless</sup> Indeed, if there were more<sup>substantialintermediation,thentheimpact ondynamicsof(endogenous)</sup> changes in the wealth distribution<sup>would matterless,as in Kruselland Smith (1998).But the microdata</sup> reject such presumed underpinnings,<sup>makingwelfaregains,potentiallosses,andthedynamicaspectof</sup> liberalization more substantial.

Still, the surprisingly large<sup>order of magnitudeof these gainsand lossessuggests theneedforfurther</sup> refinements along a number<sup>ofdimensions,toseeifthemagnitudesurvivessomewhatmorerealistic</sup> specifications.

One refinement has to do<sup>withlaborandthelabormarket.Thelabor of the model hereisuniform</sup> with respect to productivity,<sup>that is,everylaborerearnsthe samewage.This ffiesin the faceof much</sup> empirical work mapping<sup>wagedifferentialsto skillsdifferentialsandacquiredhumancapital.Moregen-</sup> erally, earnings inequality<sup>contributesto overallinequality,andthis mightbesalient,asin theworkof</sup> Ricardo Paes de Barros<sup>inBrazil,forexample. Jeongand Townsend(2000)documentthe successand</sup> failure of the LEB model in<sup>explaininginequalitymovementsinThailand,comparingitto anextended</sup> version of Greenwood and<sup>Jovanovic(1990).Thoughthe LEB modelat the maximum likelihoodparame-</sup> ter estimates does surprisingly<sup>well,it is clearthat wagedifferentiationisneeded in models and inmodel</sup> based empirical work. In<sup>themodelofoccupationchoiceofEvansandJovanovic(1989),forexample,</sup> unobserved heterogeneous<sup>skills influenceboth wage earnings and the profitsfrom entrepreneurship.This</sup> might suggest that entrepreneurs<sup>worrylessaboutincreasedwagesastheypotentiallyexittobecome</sup> part of a skilled work force.

Second, one could endogenize<sup>accessto creditasintheGreenwoodandJovanovic(1990)modelwith</sup> transactions costs. This<sup>wouldslowdownthegrowthof financialinfrastructureandwouldrationalize</sup> some of the limited participation<sup>that we seebutthere wouldbe no Pareto-improvingpolicy intervention.</sup> However, Townsend and Ueda<sup>(2001)in an extended versionof the Greenwoodand Jovanovicmodel draw</sup> the conclusion that restrictive<sup>financialsectorpoliciesmay haveneverthelesssloweddownentryinto the</sup> financial sector below the<sup>endogenousrate.Thusfinancialsector liberalization,allowingintermediation</sup> at its otherwise endogenous<sup>value,isalsoassociatedwithwelfaregains,asinthispaper</sup> Although 25