PUB - Publikationen an der Universität Bielefeld

This paper examines the consequences of international financial integration in a two-sector standard incomplete markets model with occupational choice under risk and financial constraints affecting entrepreneurial activity. We endogenize international productivity differences and discuss the implications of international integration for the macroeconomy, inequality, and welfare. Lending countries are characterized by tighter domestic constraints and experience an increase in gross national product, whereas the gross domestic product effect is ambiguous. We conclude that international integration is beneficial only for economies where there are substantial financial constraints on entrepreneurial activity. Otherwise, a majority of households suffer, due to the unequal distribution of welfare gains and losses across the heterogeneous population.