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Contractual Structure and Wealth Accumulation

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Author Info
Dilip Mookherjee (Boston University)
Debraj Ray (New York University)

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Abstract

This paper examines incentives of poor agents to escape poverty by saving. Owing to limited liability, low wealth creates borrowing constraints, preventing the poor from being able to finance productive projects. Future wealth increases resulting from current saving would relax these borrowing constraints, raising future productivity and incomes, thus providing a possible channel of upward mobility. However, the extent to which these benefits accrue to the agents themselves depends on the allocation of bargaining power with their lenders (or landlords). If agents have no bargaining power, the returns to saving of poor agents are appropriated entirely by lenders, resulting in poverty traps. In this case the long run wealth distribution becomes polarized into two classes, with no middle class and no interclass mobility. If on the other hand the agents have all the bargaining power then the returns to saving accrue to them entirely, and agents accumulate wealth indefinitely irrespective of initial conditions.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1538.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1538

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  1. Maristella Botticini & Zvi Eckstein, 2006. "Path Dependence and Occupations," Carlo Alberto Notebooks 3, Collegio Carlo Alberto. [Downloadable!]
    Other versions:
  2. MICHAEL R. CARTER & Julian May, 1999. "One Kind of Freedom: Poverty Dynamics in Post-Apartheid Africa," Wisconsin-Madison Agricultural and Applied Economics Staff Papers 427, Wisconsin-Madison Agricultural and Applied Economics Department. [Downloadable!]
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    Other versions:
  4. V. Bhaskar, 2002. "Relative Performance Evaluation and Limited Liability," Economics Discussion Papers 550, University of Essex, Department of Economics. [Downloadable!]
  5. Dilip Mookherjee & Debraj Ray, 2000. "Persistent Inequality," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-108, Boston University - Department of Economics, revised Oct 2002. [Downloadable!]
    Other versions:
  6. Patrick Legros & Andrew F. Newman & Eugenio Proto, 2006. "Smithian Growth through Creative Organization," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-158, Boston University - Department of Economics. [Downloadable!]
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  7. Dean Karlan & Jonathan Zinman, 2005. "Observing unobservables: identifying information asymmetries with a consumer-credit field experiment," Proceedings, Federal Reserve Bank of Chicago, issue Apr. [Downloadable!]
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  9. Kaniska Dam & David Perez-Castrillo, 2006. "The Principal-Agent Matching Market," Advances in Theoretical Economics, Berkeley Electronic Press, vol. 2(1), pages 1257-1257. [Downloadable!] (restricted)
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  10. Maitreesh Ghatak & Massimo Morelli & Tomas Sjostrom, 2002. "Credit Rationing, Wealth Inequality, and Allocation of Talent," STICERD - Theoretical Economics Paper Series 441, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
  11. Shankha Chakraborty & Tridip Ray, 2003. "The Development and Structure of Financial Systems," University of Oregon Economics Department Working Papers 2003-2, University of Oregon Economics Department, revised 01 Dec 2003. [Downloadable!]
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  12. Hoff, Karla & Sen, Arijit, 2004. "Homeownership, community interactions, and segregation," Policy Research Working Paper Series 3316, The World Bank. [Downloadable!]
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  13. 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. [Downloadable!]
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