Economic recoveries can be slow, fast, or involve double dips. This paper provides an explanation based on the dynamic interactions between bank lending standards and firm entry selection. Recoveries are slower when high-quality borrowers postpone their investments, which occurs if the borrower pool has lower quality on average. Double dips can occur when banks endogenously produce information, which increases waiting benefits discontinuously. The model is consistent with both aggregate- and industry-level data.

I develop a theory to jointly explain several coincident long-term trends in the United States — increased usage of intangible capital, growth and compositional shifts in the financial sector, and higher income inequality. Active finance intermediates intangible, high-risk capital by monitoring its use, whereas tangible, low-risk capital is intermediated passively. If new firms are more productive but feature less tangible or riskier assets, the model endogenously generates the aforementioned trends. Inequality is a key source of feedback effects in the model: active finance, which relies on contributions from wealthy individuals, becomes more cost-effective as inequality rises. A similar story emerges if technological progress occurs directly in the financial sector (e.g., financial innovation). I discuss several of the model’s auxiliary predictions and their potential to be consistent with the data.