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Creditor protection and the dynamics of the distribution in oligarchic societies

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  • Manuel Oechslin

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Abstract

This paper introduces credit market imperfections and barriers to entrepreneurship into the neoclassical growth model. It is assumed that only a small elite, the oligarchs, may run firms and that these oligarchs - when borrowing from workers - may renege on the debt contracts at low cost. In such an economy, poor contract enforcement slows down the transition towards the steady state and alters the dynamics of the distribution strongly in favor of the oligarchs. The reason is that the workers are forced to charge ”low” borrowing rates in order to decrease the incumbents’ incentives to default. With dynastic preferences, low returns reduce the workers’ propensity to save; they discount future wages less and consume more out of current income. Calibrations of the model suggest that the elite’s welfare gains are large - even if the oligarchic structure were associated with substantially lower productivity growth rates. These findings point to political forces behind low financial development.

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File URL: http://hdl.handle.net/10.1007/s10887-009-9047-9
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Bibliographic Info

Article provided by Springer in its journal Journal of Economic Growth.

Volume (Year): 14 (2009)
Issue (Month): 4 (December)
Pages: 313-344

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Handle: RePEc:kap:jecgro:v:14:y:2009:i:4:p:313-344

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Web page: http://www.springerlink.com/link.asp?id=102931

Related research

Keywords: Contract enforcement; Wealth distribution; Economic development; Oligarchy; O11; O43; D31;

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Cited by:
  1. Kim, Dong-Hyeon & Lin, Shu-Chin, 2011. "Nonlinearity in the financial development–income inequality nexus," Journal of Comparative Economics, Elsevier, vol. 39(3), pages 310-325, September.

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