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Contractual Structure and Wealth Accumulation

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Author Info

  • Dilip Mookherjee
  • Debraj Ray

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 Boston University, Institute for Economic Development in its series Boston University - Institute for Economic Development with number 107.

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Date of creation: Jun 2000
Date of revision:
Handle: RePEc:fth:bosecd:107

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References

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  1. Dilip Mookherjee & Debraj Ray, 2003. "Persistent Inequality," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 369-393.
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  5. MICHAEL R. CARTER & Frederic Zimmerman, 1998. "The Dynamic Cost and Persistence of Asset Inequality in an Agrarian Economy," Wisconsin-Madison Agricultural and Applied Economics Staff Papers 416, Wisconsin-Madison Agricultural and Applied Economics Department.
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  31. repec:fth:bosecd:108 is not listed on IDEAS
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