Inequality, Credit Market Imperfection, Segmentation and Economic Growth
AbstractThis paper investigates how initial inequality can causally affect economic growth when moral hazard problems exist in credit markets.Two regimes of the credit markets aiming at overcoming the moral hazard problems are analyzed.The formal one such as bank relies on intermediary between borrowers and lenders by asking for collateral.The informal one relies on direct yet costly monitoring by the lenders themselves.However, from the social point of view both of them are unfavorable to certain segments of the agents in this heterogenous economy in terms of whether the individual potential productivity could be fully realized. Consequently, the permission of the coexistence of these two regimes could be growth enhancing.The dynamic rise and fall of the formal and informal regimes are implied along the growth process of per capita income.In the empirical part, the negative relationship between initial inequality and long run growth is discovered, using cross-province data in rural China rather than more often used cross-country data sets in literature.Interestingly, the policy dummy variable telling the permission or forbidding of the informal regime presents a positive sign.Both of these two results support our theoretical model empirically. Finally, we argue that this channel to bridge inequality and economic growth is more rural specific.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2001-58.
Date of creation: 2001
Date of revision:
Contact details of provider:
Web page: http://center.uvt.nl
inequality; credit markets; moral hazard; economic growth;
Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-09-10 (All new papers)
- NEP-DEV-2001-09-10 (Development)
- NEP-MFD-2001-09-10 (Microfinance)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bengt Holmstrom & Jean Tirole, 1994.
"Financial Intermediation, Loanable Funds and the Real Sector,"
95-1, Massachusetts Institute of Technology (MIT), Department of Economics.
- Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 663-91, August.
- Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers 40, Institut d'Économie Industrielle (IDEI), Toulouse.
- Granger, Clive W. J. & Uhlig, Harald F., 1990.
"Reasonable extreme-bounds analysis,"
Journal of Econometrics,
Elsevier, vol. 44(1-2), pages 159-170.
- Clive W. J. Granger & Harald F. Uhlig, 1988. "Reasonable extreme bounds analysis," Discussion Paper / Institute for Empirical Macroeconomics 2, Federal Reserve Bank of Minneapolis.
- Tom Doan, . "EBA: RATS procedure to perform Extreme Bounds Analysis," Statistical Software Components RTS00059, Boston College Department of Economics.
- Hoff, Karla & Stiglitz, Joseph E, 1990. "Imperfect Information and Rural Credit Markets--Puzzles and Policy Perspectives," World Bank Economic Review, World Bank Group, vol. 4(3), pages 235-50, September.
- Sala-i-Martin, Xavier, 1997.
"I Just Ran Two Million Regressions,"
American Economic Review,
American Economic Association, vol. 87(2), pages 178-83, May.
- Galor, Oded & Zeira, Joseph, 1993.
"Income Distribution and Macroeconomics,"
Review of Economic Studies,
Wiley Blackwell, vol. 60(1), pages 35-52, January.
- Townsend, Robert M, 1983. "Financial Structure and Economic Activity," American Economic Review, American Economic Association, vol. 73(5), pages 895-911, December.
- Townsend, Robert M, 1995. "Financial Systems in Northern Thai Villages," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1011-46, November.
- Bénabou, Roland, 1996.
"Inequality and Growth,"
CEPR Discussion Papers
1450, C.E.P.R. Discussion Papers.
- Bencivenga, Valerie R & Smith, Bruce D, 1991.
"Financial Intermediation and Endogenous Growth,"
Review of Economic Studies,
Wiley Blackwell, vol. 58(2), pages 195-209, April.
- Jeremy Greenwood & Boyan Jovanovic, 1989.
"Financial Development, Growth, and the Distribution of Income,"
NBER Working Papers
3189, National Bureau of Economic Research, Inc.
- Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
- Greenwood, J. & Jovanovic, B., 1990. "Financial Development, Growth, And The Distribution Of Income," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9002, University of Western Ontario, The Centre for the Study of International Economic Relations.
- Greenwood, J. & Jovanovic, B., 1988. "Financial Development, Growth, And The Distribution Of Income," RCER Working Papers 131, University of Rochester - Center for Economic Research (RCER).
- Greenwood, Jeremy & Jovanovic, Boyan, 1988. "Financial Development, Growth, And The Distribution Of Income," Working Papers 88-12, C.V. Starr Center for Applied Economics, New York University.
- Aghion, Philippe & Bolton, Patrick, 1997. "A Theory of Trickle-Down Growth and Development," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 151-72, April.
- Levine, Ross & Renelt, David, 1991.
"A sensitivity analysis of cross-country growth regressions,"
Policy Research Working Paper Series
609, The World Bank.
- Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-63, September.
- Persson, T. & Tabellini, G., 1993.
"Is Inequality Harmful for Growth,"
537, Stockholm - International Economic Studies.
- Clarke, George R. G., 1995.
"More evidence on income distribution and growth,"
Journal of Development Economics,
Elsevier, vol. 47(2), pages 403-427, August.
- Levine, Ross & Zervos, Sara J, 1993. "What We Have Learned about Policy and Growth from Cross-Country Regressions?," American Economic Review, American Economic Association, vol. 83(2), pages 426-30, May.
- Kevin M. Murphy & Andrei Shleifer & Robert Vishny, 1988.
"Income Distribution, Market Size, and Industrialization,"
NBER Working Papers
2709, National Bureau of Economic Research, Inc.
- Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1989. "Income Distribution, Market Size, and Industrialization," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 537-64, August.
- Bose, Pinaki, 1998. "Formal-informal sector interaction in rural credit markets," Journal of Development Economics, Elsevier, vol. 56(2), pages 265-280, August.
- Josef Falkinger & Josef Zweimüller, 1997. "The Impact of Income Inequality on Product Diversity and Economic Growth," Metroeconomica, Wiley Blackwell, vol. 48(3), pages 211-237, October.
- Philippe Aghion & Eve Caroli & Cecilia Garcia-Penalosa, 1998. "Uncovering some causal relationships between inequality and economic growth," IFS Working Papers W98/02, Institute for Fiscal Studies.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Broekman).
If references are entirely missing, you can add them using this form.