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Distributional Implications of Imperfect Capital Markets

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Joon Koo Lee
Abstract

The primary aim of this study is to analyze the impact of imperfections in capital markets on individuals' lifetime allocation plans and the resulting implications for income distribution. The model builds upon Samuelson's overlapping generation model with human capital and bequest motives playing central roles. The model developed here introduces a limit on the individual's ability to borrow. One of the most important consequences of this constraint is that human investment falls short of the level where its marginal return is equal to that of non-human investment. The comparative static results show that an individual who has been subject to the borrowing constraint would increase human investment unambiguously if he were allowed to borrow freely against future earnings. Discussions of the distributive implications of this result suggest that the elimination of the borrowing constraint has a potential of enhancing both intragenerational income equality and intergenerational mobility. The simulation results show that the elimination of the borrowing limit would bring about a significant improvement in income distribution without having an adverse effect on efficiency.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0663.

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Date of creation: Apr 1981
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Handle: RePEc:nbr:nberwo:0663

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  1. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467. [Downloadable!] (restricted)
  2. Pryor, Frederic L, 1973. "Simulation of the Impact of Social and Economic Institutions on the Size Distribution of Income and Wealth," American Economic Review, American Economic Association, vol. 63(1), pages 50-72, March.
  3. Lazear, Edward P, 1977. "Education: Consumption or Production?," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 569-97, June. [Downloadable!] (restricted)
  4. Levhari, David & Weiss, Yoram, 1974. "The Effect of Risk on the Investment in Human Capital," American Economic Review, American Economic Association, vol. 64(6), pages 950-63, December. [Downloadable!] (restricted)
  5. Sahota, Gian Singh, 1978. "Theories of Personal Income Distribution: A Survey," Journal of Economic Literature, American Economic Association, vol. 16(1), pages 1-55, March. [Downloadable!] (restricted)
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