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Credit Rationing, Wealth Inequality, and Allocation of Talent

Author

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  • Maitreesh Ghatak

    (London School of Economics)

  • Massimo Morelli

    (Department of Economics, Ohio State University)

  • Tomas Sjostrom

    (Department of Economics, Rutgers the State University of New Jersey)

Abstract

We study an economy where agents are heterogeneous in terms of observable wealth and unobservable talent. Adverse selection forces creditors to ask for collateral. We study the two-way interaction between rationing in the credit market and the wages offered in the labor market. Both pooling and separating credit contracts can be offered in equilibrium. The minimum wealth needed to obtain a separating contract is decreasing in the wage, whereas the minimum wealth needed for a pooling contract is increasing in the wage. If the first effect dominates, the derived labor demand can be upward sloping, resulting in the possibility of multiple equilbria.

Suggested Citation

  • Maitreesh Ghatak & Massimo Morelli & Tomas Sjostrom, 2002. "Credit Rationing, Wealth Inequality, and Allocation of Talent," Economics Working Papers 0026, Institute for Advanced Study, School of Social Science.
    • Handle: RePEc:ads:wpaper:0026
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    3. Juan M. Sánchez, 2003. "Universitary Financing and Welfare: A Dynamic Analysis with Heterogeneous Agents and Overlapping Generations," Department of Economics, Working Papers 047, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.
    4. Takalo, Tuomas & Toivanen, Otto, 2003. "Equilibrium in financial markets with adverse selection," Bank of Finland Research Discussion Papers 6/2003, Bank of Finland.
    5. Gajdos, Thibault & Maurin, Eric, 2004. "Unequal uncertainties and uncertain inequalities: an axiomatic approach," Journal of Economic Theory, Elsevier, vol. 116(1), pages 93-118, May.
    6. Joydeep Bhattacharya & Shankha Chakraborty, 2005. "What do information frictions do?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(3), pages 651-675, October.
    7. Antonio Lijoi & Igor Prünster & Stephen G. Walker, 2004. "Contributions to the understanding of Bayesian consistency," ICER Working Papers - Applied Mathematics Series 13-2004, ICER - International Centre for Economic Research.
    8. Francesco Caselli & Nicola Gennaioli, 2013. "Dynastic Management," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 971-996, January.
    9. Banerjee, Abhijit V. & Ghatak, Maitreesh, 2004. "Eviction threats and investment incentives," Journal of Development Economics, Elsevier, vol. 74(2), pages 469-488, August.
    10. Takalo, Tuomas & Toivanen, Otto, 2003. "Equilibrium in financial markets with adverse selection," Research Discussion Papers 6/2003, Bank of Finland.
    11. Renault, Jerome & Scarlatti, Sergio & Scarsini, Marco, 2005. "A folk theorem for minority games," Games and Economic Behavior, Elsevier, vol. 53(2), pages 208-230, November.
    12. Antonio Lijoi & Igor Prünster & Stephen G. Walker, 2004. "On consistency of nonparametric normal mixtures for Bayesian density estimation," ICER Working Papers - Applied Mathematics Series 23-2004, ICER - International Centre for Economic Research.
    13. Castagnoli, Erio & Maccheroni, Fabio & Marinacci, Massimo, 2002. "Insurance premia consistent with the market," Insurance: Mathematics and Economics, Elsevier, vol. 31(2), pages 267-284, October.
    14. Banerjee, Abhijit V. & Duflo, Esther, 2005. "Growth Theory through the Lens of Development Economics," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 7, pages 473-552, Elsevier.
    15. Clemens, Christiane, 2004. "Monopolistic Competition and Entrepreneurial RiskRTaking -Too many Cooks Spoil the Broth (but Everyone is better off) -," Hannover Economic Papers (HEP) dp-303, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    16. Antonio Lijoi & Igor Prünster & Stephen G. Walker, 2004. "On rates of convergence for posterior distributions in infinite–dimensional models," ICER Working Papers - Applied Mathematics Series 24-2004, ICER - International Centre for Economic Research.
    17. Müller, Alfred & Scarsini, Marco, 2005. "Archimedean copulæ and positive dependence," Journal of Multivariate Analysis, Elsevier, vol. 93(2), pages 434-445, April.
    18. Fabio Maccheroni & William H. Ruckle, 2001. "BV as a dual space," ICER Working Papers - Applied Mathematics Series 29-2001, ICER - International Centre for Economic Research.
    19. repec:zbw:bofrdp:2003_006 is not listed on IDEAS
    20. Bandyopadhyay, Siddhartha, 2013. "Market thickness, prices and honesty: A quality demand trap," Mathematical Social Sciences, Elsevier, vol. 65(1), pages 52-59.
    21. Salvatore Modica & Marco Scarsini, 2003. "The convexity-cone approach to comparative risk and downside risk," ICER Working Papers - Applied Mathematics Series 01-2003, ICER - International Centre for Economic Research.
    22. Esteban Jaimovich, 2006. "Sectors Expansion, Allocation of Talent and Adverse Selection in Development," DEGIT Conference Papers c011_018, DEGIT, Dynamics, Economic Growth, and International Trade.
    23. Nicolas Piluso, 2011. "Chômage involontaire et rationnement du crédit : une relecture de la relation salaire-emploi," Post-Print hal-00809436, HAL.
    24. Enrico Diecidue & Fabio Maccheroni, 2002. "Coherence without Additivity," ICER Working Papers - Applied Mathematics Series 10-2002, ICER - International Centre for Economic Research.

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    More about this item

    Keywords

    Occupational Choice; Adverse Selection; Wealth Distribution; Credit Rationing;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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