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Contractual Structure and Wealth Accumulation

  • Dilip Mookherjee
  • Debraj Ray

Can historical wealth distributions affect long-run output and inequality despite "rational" saving, convex technology and no externalities? We consider a model of equilibrium short-period financial contracts, where poor agents face credit constraints owing to moral hazard and limited liability. If agents have no bargaining power, poor agents have no incentive to save: poverty traps emerge and agents are polarized into two classes, with no interclass mobility. If instead agents have all the bargaining power, strong saving incentives are generated: the wealth of poor and rich agents alike drift upward indefinitely and "history" does not matter eventually. (D31, D91, I32, O17, Q15)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 92 (2002)
Issue (Month): 4 (September)
Pages: 818-849

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Handle: RePEc:aea:aecrev:v:92:y:2002:i:4:p:818-849
Note: DOI: 10.1257/00028280260344489
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