Caroline Betts (Department of Economics, University of Southern California, Los Angeles, CA 90089, USA) Joydeep Bhattacharya () (Department of Economics, State University of New York at Buffalo, Buffalo, NY 14260, USA)
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This paper develops a model in which two information frictions are embedded into an otherwise conventional neoclassical growth model; an adverse selection problem in the labor market and a costly state verification problem in the credit market. The former allows equilibrium unemployment to arise endogenously while the latter is responsible for equilibrium credit rationing. This structure is used to investigate a theoretical link between the level of unemployment and the extent of credit rationing (and capital formation). The presence of the labor market friction is enough to generate scope for multiple steady state equilibria. The model also generates a large class of endogenous cyclical and chaotic dynamical equilibria. Development trap phenomena may also appear.
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Article provided by Springer in its journal Economic Theory.
Volume (Year): 12 (1998) Issue (Month): 3 () Pages: 489-517 Download reference. The following formats are available: HTML,
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Find related papers by JEL classification: E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical J6 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies J2 - Labor and Demographic Economics - - Demand and Supply of Labor
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