Equity and Efficiency under Imperfect Credit Markets
AbstractRecent 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 InfoPaper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c011_042.
Length: 18 pages
Date of creation: Jun 2006
Date of revision:
capital market imperfections; inequality; growth; efficiency;
Other versions of this item:
- Reto Foellmi & Manuel Oechslin, 2006. "Equity and Efficiency under Imperfect Credit Markets," IEW - Working Papers 265, Institute for Empirical Research in Economics - University of Zurich.
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-12-01 (All new papers)
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