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Equity and Efficiency under Imperfect Credit Markets

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  • Reto Foellmi
  • Manuel Oechslin

Abstract

Recent macroeconomic research discusses credit market imperfections as a key channel through which inequality retards growth. Limited borrowing prevents the less affluent individuals from investing the efficient amount, and the inefficiencies are considered to become stronger as inequality rises. This paper, though, argues that higher inequality may actually boost aggregate output even with convex technologies and limited borrowing. Less equality in the middle or at the top end of the distribution is associated with a lower borrowing rate and hence better access to credit for the poor. We find, however, that rising relative poverty is unambiguously bad for economic performance. Hence, we suggest that future empirical work on the inequality-growth nexus should use more specific measures of inequality rather than measures of ”overall” inequality such as the Gini index.

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Bibliographic Info

Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c011_042.

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Length: 18 pages
Date of creation: Jun 2006
Date of revision:
Handle: RePEc:deg:conpap:c011_042

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Keywords: capital market imperfections; inequality; growth; efficiency;

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  1. Thomas Piketty, 1992. "Imperfect Capital Markets and Persistence of Initial Wealth Inequalities," STICERD - Theoretical Economics Paper Series, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE /1992/255, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  2. Banerjee, Abhijit V & Duflo, Esther, 2003. " Inequality and Growth: What Can the Data Say?," Journal of Economic Growth, Springer, Springer, vol. 8(3), pages 267-99, September.
  3. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  4. Aghion, Philippe & Bolton, Patrick, 1997. "A Theory of Trickle-Down Growth and Development," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 64(2), pages 151-72, April.
  5. Kiminori Matsuyama, 1998. "Endogenous Inequality," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1238, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, Springer, vol. 5(1), pages 5-32, March.
  7. Benabou, R., 1996. "Inequality and Growth," Working Papers, C.V. Starr Center for Applied Economics, New York University 96-22, C.V. Starr Center for Applied Economics, New York University.
  8. Banerjee, Abhijit & Newman, Andrew F, 1998. "Information, the Dual Economy, and Development," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 65(4), pages 631-53, October.
  9. Sarah Voitchovsky, 2005. "Does the Profile of Income Inequality Matter for Economic Growth?," Journal of Economic Growth, Springer, Springer, vol. 10(3), pages 273-296, 09.
  10. Piketty, Thomas, 1997. "The Dynamics of the Wealth Distribution and the Interest Rate with Credit Rationing," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 64(2), pages 173-89, April.
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