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  • Jess Benhabib
  • Aldo Rustichini

Abstract

In this paper we study the relationship between wealth, income distribution and growth in a game-theoretic context in which property rights are not completely enforceable. We consider equilibrium paths of accumulation which yield players utilities that are at least as high as those that they could obtain by appropriating higher consumption at the present and suffering retaliation later on. We focus on those subgame perfect equilibria which are constrained Pareto-efficient (second best). In this set of equilibria we study how the level of wealth affects growth. In particular we consider cases which produce classical traps (with standard concave technologies): growth may not be possible from low levels of wealth because of incentive constraints while policies (sometimes even first-best policies) that lead to growth are sustainable as equilibria from higher levels of wealth. We also study cases which we classify as the "Mancur Olson" type: first best policies are used at low levels of wealth along these constrained Pareto efficient equilibria, but first best policies are not sustainable at higher levels of wealth where growth slows down. We also consider the unequal weighting of players to trace the subgame perfect equilibria on the constrained Pareto frontier. We explore the relation between sustainable growth rates and the level of inequality in the distribution of income.

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Bibliographic Info

Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 937.

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Date of creation: May 1991
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Handle: RePEc:nwu:cmsems:937

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Web page: http://www.kellogg.northwestern.edu/research/math/
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Cited by:
  1. Stephane Pallage, 1996. "A Two-Country Model of Renewable Resource Sharing," Cahiers de recherche CREFE / CREFE Working Papers 41, CREFE, Université du Québec à Montréal.
  2. Morana, Claudio, 2002. "An empirical investigation of long-run growth in the UK," Structural Change and Economic Dynamics, Elsevier, vol. 13(1), pages 49-70, March.
  3. Ryo Horii & Ryoji Ohdoi & Kazuhiro Yamamoto, 2005. "Finance, Technology and Inequality in Economic Development," Development and Comp Systems 0504004, EconWPA, revised 31 Jul 2005.
  4. Andres Velasco, 1997. "A Model of Endogenous Fiscal Deficits and Delayed Fiscal Reforms," NBER Working Papers 6336, National Bureau of Economic Research, Inc.
  5. Nissanke, Machiko & Thorbecke, Erik, 2006. "Channels and policy debate in the globalization-inequality-poverty nexus," World Development, Elsevier, vol. 34(8), pages 1338-1360, August.
  6. Jess Benhabib & Mark M. Spiegel, 1997. "Growth and investment across countries," Working Papers in Applied Economic Theory 97-03, Federal Reserve Bank of San Francisco.
  7. Marco Ferroni & Mercedes Mateo Díaz & J. Mark Payne, 2007. "Development under Conditions of Inequality and Distrust: An Exploration of the Role of Social Capital and Social Cohesion in Latin America," IDB Publications 53818, Inter-American Development Bank.
  8. Horst Siebert, 1998. "Commentary : economic consequences of income inequality," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 265-281.

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