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Unemployment, credit rationing, and capital accumulation: a tale of two frictions


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  • 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)


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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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 12 (1998)
Issue (Month): 3 ()
Pages: 489-517

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Handle: RePEc:spr:joecth:v:12:y:1998:i:3:p:489-517

Note: Received: April 10, 1998; revised version: May 20, 1998
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Keywords: Unemployment · Credit rationing · Cycles · Chaos.;

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Cited by:
  1. Daitoh, Ichiroh, 2003. "Financial liberalization, urban unemployment and welfare: some implications of the artificial low interest rate and the high wage rate policies in LDCs," Journal of Development Economics, Elsevier, vol. 72(1), pages 163-179, October.
  2. António Antunes & Tiago Cavalcanti & Anne Villamil, 2006. "Computing General Equilibrium Models with Occupational Choice and Financial Frictions," SCAPE Policy Research Working Paper Series 0611, National University of Singapore, Department of Economics, SCAPE.


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