Robert Townsend's New Book on Thai TFP Dynamics
I bet that all fans of the Roy Model of comparative advantage and self selection into sectors will really like this book.
As discussed in Chapter 6, each worker faces an occupational choice. He can work as an unskilled worker, work for a firm, or start his own firm. But, to start your own firm requires capital to set up the small factory and there is no banking system to lend you the $ so you must self finance. Townsend introduces heterogeneity along 2 dimensions. People differ with respect to their wage from working at the firm and they differ with respect to their endowment of wealth (capital).
Rational households self select into the occupations that maximize their utility subject to these constraints.
If there were perfect capital markets, talented people would start up firms and if they needed capital to do so --- they would borrow it. Low talent people with capital would not start up firms but would rent their capital to more productive people.
When there are no capital markets; (i.e you can't borrow or lend) --- some talented people will not set up firms because they are liquidity constrained and some morons with capital will set up firms because there is no opportunity cost of setting up such a business.
Financial market "completeness" means that the high talent/low capital people have increased access to borrowing and they now become firms and low talent/high capital people exit the business as they become banks rather than firms.
This firm level composition shifts has "macro consequences" as average TFP rises for this industry due to entry and exit and increases in the scale of the most productive firms and all of this is triggered by financial innovations (i.e the introduction of borrowing and lending).
Note that a Macro TFP accounting researcher would miss all of this. There isn't any "exogenous technological change" taking place. There is a sector re-allocation. If 10 low talent/high capital people exit and 10 high talent/low capital people enter, a disciple of Solow would say that there has been no change in labor for this industry but that's not true. The micro model of selection (the Roy Model Townsend writes down) indicates that the workers will now sort on quality rather than quality and capital availability once you relax the borrowing constraint.
To his credit, Townsend has devoted years to collecting data in Thailand and he has cool data on social networks and borrowing and risk sharing. My only tough question for him is whether there are other "structural models" that could generate the facts that he has documented using these data. But, this is a very promising vision for how "macro" can be done in the presence of micro heterogeneity.