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Asset pooling, credit rationing, and growth

  • Andreas Lehnert

I study the effect of improved financial intermediation on the process of capital accumulation by augmenting a standard model with a general contract space. With the extra contracts, intermediaries endogenously begin using ROSCAs, or Rotating Savings and Credit Associations. These contracts allow poor agents, previously credit rationed, access to credit. As a result, agents work harder and total economy-wide output increases; however, these gains come at the cost of increased inequality. I provide sufficient conditions for the allocations to be Pareto optimal, and for there to be a unique invariant distribution of wealth. I provide an analytic characterization of a simple model and use numerical techniques to study more general models.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1998-52.

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Date of creation: 1998
Date of revision:
Handle: RePEc:fip:fedgfe:1998-52
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  1. Besley, T. & Coate, S. & Loury, G., 1990. "The Economics Of Rotating Savings And Credit Associations," Papers 149, Princeton, Woodrow Wilson School - Development Studies.
  2. Phelan, C. & Townsend, R.M., 1990. "Computing Multiperiod, Information-Constrained Optima," University of Chicago - Economics Research Center 90-13, Chicago - Economics Research Center.
  3. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April.
  4. Prescott, Edward C & Townsend, Robert M, 1984. "General Competitive Analysis in an Economy with Private Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 1-20, February.
  5. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
  6. Lehnert, Andreas & Ligon, Ethan & Townsend, Robert M., 1999. "Liquidity Constraints And Incentive Contracts," Macroeconomic Dynamics, Cambridge University Press, vol. 3(01), pages 1-47, March.
  7. repec:oup:restud:v:58:y:1991:i:5:p:853-81 is not listed on IDEAS
  8. repec:oup:restud:v:61:y:1994:i:4:p:701-19 is not listed on IDEAS
  9. Edward C Prescott & Robert M Townsend, 2010. "Pareto Optima and Competitive Equilibria With Adverse Selection and Moral Hazard," Levine's Working Paper Archive 2069, David K. Levine.
  10. repec:oup:restud:v:64:y:1997:i:2:p:173-89 is not listed on IDEAS
  11. Edward Simpson Prescott, 1998. "Computing moral-hazard problems using the Dantzig-Wolfe decomposition algorithm," Working Paper 98-06, Federal Reserve Bank of Richmond.
  12. repec:oup:restud:v:64:y:1997:i:2:p:151-72 is not listed on IDEAS
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