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Creditor Protection and the Dynamics of the Distribution in Oligarchic Societies

Listed author(s):
  • Manuel Oechslin

This paper introduces credit market imperfections and barriers to entrepreneurship into the neoclassical growth model. It is assumed that only a small elite, the oligarchs, may run firms and that these oligarchs - when borrowing from workers - may renege on the debt contracts at low cost. In such an economy, poor contract enforcement slows down the transition towards the steady state and alters the dynamics of the distribution strongly in favor of the oligarchs. The reason is that the workers are forced to charge ”low” borrowing rates in order to decrease the incumbents’ incentives to default. With dynastic preferences, low returns reduce the workers’ propensity to save; they discount future wages less and consume more out of current income. Calibrations of the model suggest that the elite’s welfare gains are large - even if the oligarchic structure were associated with substantially lower productivity growth rates. These findings point to political forces behind low financial development.

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File URL: http://degit.sam.sdu.dk/papers/degit_11/C011_052.pdf
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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c011_052.

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Length: 44 pages
Date of creation: Jun 2006
Handle: RePEc:deg:conpap:c011_052
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