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Contractual Structure and Wealth Accumulation

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  • Dilip Mookherjee

    (Boston University)

  • Debraj Ray

    (New York University)

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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Bibliographic Info

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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