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Credit market imperfections, income distribution, and capital accumulation

Author

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  • Joydeep Bhattacharya

    (Department of Economics, State University of New York at Buffalo, Fronczak Hall, Buffalo, NY 14260, USA)

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.

Suggested Citation

  • Joydeep Bhattacharya, 1997. "Credit market imperfections, income distribution, and capital accumulation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(1), pages 171-200.
  • Handle: RePEc:spr:joecth:v:11:y:1997:i:1:p:171-200
    Note: Received: June 3, 1996; revised version: February 4, 1997
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Mariacristina De Nardi & Marco Cagetti, 2005. "Estate taxes, entrepreneuship, and wealth," 2005 Meeting Papers 144, Society for Economic Dynamics.
    3. Agnès Labye & Christine Lagoutte & Françoise Renversez, 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.
    4. 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.
    5. Jose L Wynne, 2001. "Financial Frictions in Business Cycles, Trade and Growth," Levine's Working Paper Archive 625018000000000127, David K. Levine.
    6. 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).
    7. Marco Cagetti & Mariacristina De Nardi, 2004. "Taxation, entrepreneurship, and wealth," Staff Report 340, Federal Reserve Bank of Minneapolis.
    8. Bossmann, Martin & Kleiber, Christian & Walde, Klaus, 2007. "Bequests, taxation and the distribution of wealth in a general equilibrium model," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1247-1271, August.
    9. José Wynne, 2005. "Wealth as a Determinant of Comparative Advantage," American Economic Review, American Economic Association, vol. 95(1), pages 226-254, March.
    10. Bhattacharya, Joydeep & Qiao, Xue & Wang, Min, 2016. "Endogenous Borrowing Constraints And Wealth Inequality," Macroeconomic Dynamics, Cambridge University Press, vol. 20(06), pages 1413-1431, September.
    11. Bhattacharya, Joydeep, 2003. "Monetary Policy And The Distribution Of Income," Staff General Research Papers Archive 11072, Iowa State University, Department of Economics.
    12. 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.
    13. Kirill Borissov & Stéphane Lambrecht, 2009. "Growth and distribution in an AK-model with endogenous impatience," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 39(1), pages 93-112, April.
    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.
    15. 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.

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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