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Equity and Efficiency under Imperfect Credit Markets

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  • Reto Foellmi
  • Manuel Oechslin

Abstract

Recent macroeconomic research discusses credit market imperfections as a key channel through which inequality retards growth. Limited borrowing prevents the less affluent individuals from investing the efficient amount, and the inefficiencies are considered to become stronger as inequality rises. This paper, though, argues that higher inequality may actually boost aggregate output even with convex technologies and limited borrowing. Less equality in the middle or at the top end of the distribution is associated with a lower borrowing rate and hence better access to credit for the poor. We find, however, that rising relative poverty is unambiguously bad for economic performance. Hence, we suggest that future empirical work on the inequality-growth nexus should use more specific measures of inequality rather than measures of “overall” inequality such as the Gini index.

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Paper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 265.

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Date of creation: Jan 2006
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Handle: RePEc:zur:iewwpx:265

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Keywords: capital market imperfections; inequality; growth; efficiency;

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  1. Banerjee, Abhijit V & Duflo, Esther, 2003. " Inequality and Growth: What Can the Data Say?," Journal of Economic Growth, Springer, vol. 8(3), pages 267-99, September.
  2. Piketty, Thomas, 1997. "The Dynamics of the Wealth Distribution and the Interest Rate with Credit Rationing," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 173-89, April.
  3. Bénabou, Roland, 1996. "Inequality and Growth," CEPR Discussion Papers 1450, C.E.P.R. Discussion Papers.
  4. Thomas Piketty, 1992. "Imperfect Capital Markets and Persistence of Initial Wealth Inequalities," STICERD - Theoretical Economics Paper Series /1992/255, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  5. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
  6. Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers 2013-12, Brown University, Department of Economics.
  7. Sarah Voitchovsky, 2005. "Does the Profile of Income Inequality Matter for Economic Growth?," Journal of Economic Growth, Springer, vol. 10(3), pages 273-296, 09.
  8. Aghion, Philippe & Bolton, Patrick, 1997. "A Theory of Trickle-Down Growth and Development," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 151-72, April.
  9. Matsuyama, Kiminori, 2000. "Endogenous Inequality," Review of Economic Studies, Wiley Blackwell, vol. 67(4), pages 743-59, October.
  10. Banerjee, Abhijit & Newman, Andrew F, 1998. "Information, the Dual Economy, and Development," Review of Economic Studies, Wiley Blackwell, vol. 65(4), pages 631-53, October.
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