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Credit rationing, wealth inequality and allocation of talent

  • Maitreesh Ghatak
  • Massimo Morelli
  • Tomas Sjostrom

We study an economy where agents are heterogeneous in terms of observable wealth and unobservable talent. Adverse selection forces creditors to ask for collateral. We study the two-way interaction between rationing in the credit market and the wages offered in the labour market. Both pooling and separating credit contracts can be offered in equilibrium. The minimum wealth needed to obtain a separating contract is decreasing in the wage, whereas the minimum wealth needed for a pooling contract is increasing in the wage. If the first effect dominates, the derived labour demand can be upward sloping, resulting in the possibility of multiple equilibria.

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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 5922.

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Length: 30 pages
Date of creation: Sep 2002
Date of revision:
Handle: RePEc:ehl:lserod:5922
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