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Imperfect Capital Markets and Persistence of Initial Wealth Inequalities

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  • Thomas Piketty

Abstract

We consider an infinite-horizon inter-generational economy with identical agents differing only in their inherited wealth and with a constant-returns-to-scale technology using capital and labour (called "effort") and displaying a purely idiosyncratic risk. If effort is contractible, full insurance contracts make the production deterministic and initial wealth inequalities cannot persist (just as in a neoclassical growth model). But if effort is not contractible the ability to commit is an increasing function of initial wealth so that in equilibrium poorer agents face tougher credit rationing and take smaller projects (i.e. use less capital); although there is no poverty trap, the initial distribution may have long-run effects: there can be multiple long-run stationary distributions, and all are continuous and ergodic on the same interval, but have different equilibrium interest rates (and therefore different degrees of intergenerational mobility). This provides an explanation for wealth differentials within a country as well as between countries, and a basis for redistributive policies with long-run effects.

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Bibliographic Info

Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Theoretical Economics Paper Series with number /1992/255.

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Date of creation: Nov 1992
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Handle: RePEc:cep:stitep:/1992/255

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Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

Related research

Keywords: Wealth distribution; credit rationing; multiplicity.;

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Cited by:
  1. Foellmi, Reto & Oechslin, Manuel, 2008. "Why progressive redistribution can hurt the poor," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 738-747, April.
  2. Banerjee, Abhijit V & Newman, Andrew F, 1994. "Poverty, Incentives, and Development," American Economic Review, American Economic Association, vol. 84(2), pages 211-15, May.
  3. Reto Foellmi & Manuel Oechslin, 2006. "Equity and Efficiency under Imperfect Credit Markets," DEGIT Conference Papers c011_042, DEGIT, Dynamics, Economic Growth, and International Trade.
  4. Paul, Gilles Saint & Verdier, Thierry, 1996. "Inequality, redistribution and growth: A challenge to the conventional political economy approach," European Economic Review, Elsevier, vol. 40(3-5), pages 719-728, April.

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