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Credit Market Imperfections, Income Distribution, and Capital Accumulation

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  • Bhattacharya, Joydeep

Abstract

This paper builds a model in which the distribution of income matters for capital formation, and uses it to analyze the effects of a simple policy intended to create a more equal distribution of income on the severity of certain credit market imperfections and, through this channel, capital accumulation. A neoclassical growth model is developed in which some capital investment must be externally financed, and external finance is subject to a standard costly state verification (CSV) problem. In particular, some fraction of the population is "capitalists'', who have access to risky but high return capital production technologies. Successful capitalists leave bequests to their offspring, thereby permitting them to internally finance some fraction of their own investment projects. However some external finance is also required. This is provided by "workers'' who save out of labor income. As is well known, the greater the capability of capitalists to provide internal finance, the less severe is the CSV problem. Thus bequests mitigate credit market frictions and, in that sense, promote financial market efficiency and capital accumulation. However, they also perpetrate income inequality. The structure is used to show that a policy that taxes the bequests of capitalists, and transfers the proceeds to workers, necessarily reduces the steady state capital stock. Indeed, when this effect is sufficiently strong, these redistributive tax/transfer schemes can reduce the total (wage plus transfer) incomes of workers, as well as their welfare. Thus some simple policies intended to redistribute income can be highly counterproductive.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 5105.

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Date of creation: 01 Jan 1998
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Publication status: Published in Economic Theory, January 1998, vol. 11 no. 1, pp. 171-200
Handle: RePEc:isu:genres:5105

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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  1. Galor, Oded & Zeira, Joseph, 1988. "Income Distribution and Macroeconomics," MPRA Paper 51644, University Library of Munich, Germany, revised 01 Sep 1989.
  2. Border, Kim C & Sobel, Joel, 1987. "Samurai Accountant: A Theory of Auditing and Plunder," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 525-40, October.
  3. Polemarchakis, H M, 1983. "On the Transer Paradox," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(3), pages 749-60, October.
  4. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  5. Galor, O. & Polemarchakis, H.M., 1984. "Intertemporal equilibrium and the transfor paradox," CORE Discussion Papers 1984014, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Andreoni, James, 1989. "Giving with Impure Altruism: Applications to Charity and Ricardian Equivalence," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1447-58, December.
  7. Banerjee, Abhijit V & Newman, Andrew F, 1991. "Risk-Bearing and the Theory of Income Distribution," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 211-35, April.
  8. Williamson, Stephen D, 1987. "Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 135-45, February.
  9. Takatoshi Ito & Anne O. Krueger, 1992. "The Political Economy of Tax Reform, NBER-EASE Volume 1," NBER Books, National Bureau of Economic Research, Inc, number ito_92-2, octubre-d.
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Cited by:
  1. Christian Kleiber & Martin Sexauer & Klaus Waelde, 2006. "Bequests, Taxation and the Distribution of Wealth in a General Equilibrium Model," CESifo Working Paper Series 1723, CESifo Group Munich.
  2. José Wynne, 2005. "Wealth as a Determinant of Comparative Advantage," American Economic Review, American Economic Association, vol. 95(1), pages 226-254, March.
  3. Anginer, Deniz & de la Torre, Augusto & Ize, Alain, 2011. "Risk absorption by the state: when is it good public policy ?," Policy Research Working Paper Series 5893, The World Bank.
  4. Françoise Renversez & Christine Lagoutte & Agnès Labye, 2002. "Banques mutualistes et systèmes financiers : une analyse comparative Allemagne, Grande-Bretagne, France," Revue d'Économie Financière, Programme National Persée, vol. 67(3), pages 85-109.
  5. Kirill Borissov & Stéphane Lambrecht, 2009. "Growth and distribution in an AK-model with endogenous impatience," Economic Theory, Springer, vol. 39(1), pages 93-112, April.
  6. Bhattacharya, Joydeep, 2003. "Monetary Policy And The Distribution Of Income," Staff General Research Papers 11072, Iowa State University, Department of Economics.
  7. Jose L Wynne, 2001. "Financial Frictions in Business Cycles, Trade and Growth," Levine's Working Paper Archive 625018000000000127, David K. Levine.
  8. WaiHong Ho & Yong Wang, 2013. "Asymmetric Information, Auditing Commitment, and Economic Growth," Canadian Journal of Economics, Canadian Economics Association, vol. 46(2), pages 611-633, May.
  9. Atsue Mizushima & Keiichi Koda, 2007. "Risk Sharing and Growth in the Gifts Economy," Discussion Papers in Economics and Business 07-02, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  10. Mariacristina De Nardi & Marco Cagetti, 2005. "Estate taxes, entrepreneuship, and wealth," 2005 Meeting Papers 144, Society for Economic Dynamics.
  11. Riccarda Longaretti & Domenico Delli Gatti, 2002. "Monetary Policy and the Distribution of Wealth in a OLG Economy with Heterogeneous Agents, Money and Bequests," Working Papers 60, University of Milano-Bicocca, Department of Economics, revised Oct 2002.
  12. Marco Cagetti & Mariacristina De Nardi, 2006. "Taxation, entrepreneurship, and wealth," Working Paper Series WP-06-07, Federal Reserve Bank of Chicago.
  13. Anginer, Deniz & de la Torre, Augusto & Ize, Alain, 2014. "Risk-bearing by the state: When is it good public policy?," Journal of Financial Stability, Elsevier, vol. 10(C), pages 76-86.
  14. Riccarda Longaretti & Domenico Delli Gatti, 2006. "The Non-Superneutrality of Money and its Distributional Effects when Agents are Heterogeneous and Capital Markets are Imperfect," Working Papers 95, University of Milano-Bicocca, Department of Economics, revised May 2006.

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