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Credit rationing, wealth inequality, and allocation of talent

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  • Maitreesh Ghatak

    ()

  • Massimo Morelli
  • Tomas Sjoström

Abstract

We provide a simple model of credit rationing with endogenous occupational chioce. Entrepreneurial talent is subject to private information and to screen borrowers banks ask for collateral. The interplay between the labour market and the credit market leads to multiple equilibria in a natural way. The higher is the wage rate, the lower is the collateral needed to discourage less talented agents from borrowing. This allows a greater number of poor but talented agets to become entrepreneurs, thereby increasing labor demand and justifying the wage increase. We discuss the implications of our model for economic policy which are very different from those suggested by models that focus on the credit market only.

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File URL: http://www.icer.it/docs/wp2001/Morelli23-01.pdf
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Bibliographic Info

Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers - Applied Mathematics Series with number 23-2001.

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Length: 45 pages
Date of creation: Jul 2001
Date of revision:
Handle: RePEc:icr:wpmath:23-2001

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Keywords: occupational choice; adverse selection; wealth distribution; credit rationing;

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References

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  33. repec:fth:bosecd:108 is not listed on IDEAS
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