We characterize an equilibrium development process driven by the interaction of the distribution of wealth with credit constraints and the distribution of entrepreneurial skills. When efficient entrepreneurs are relatively abundant, a "traditional" development process emerges in which the evolution of macroeconomic variables accord with empirical regularities and income inequality traces out a Kuznets curve. If, instead, efficient entrepreneurs are relatively scarce, the model generates long-run "distributional cycles" driven by the endogenous interaction between credit constraints, entrepreneurial efficiency and equilibrium wages. Copyright 2000 by The Review of Economic Studies Limited
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