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Distinguishing limited commitment from moral hazard in models of growth with inequality

  • Anna L. Paulson
  • Robert M. Townsend

We use non-parametric, reduced form and structural techniques to distin-guish the micro-economic foundations of two models of growth with increasing inequality using new data from rural and semi-urban households in Thailand. We estimate a limited commitment model that is similar to Evans and Jovanovic (1989) and a moral hazard model that is an extension of Aghion and Bolton (1996). Both models emphasize the role of occupational choice and financial constraints. While the models share many implications, they are distinguished by their assumptions about the nature of financial market imperfections. We provide structural and reduced form evidence that the dominant source of credit market imperfections varies with wealth. For poorer households limited commit-ment is the dominant concern. However, as wealth increases moral hazard gains importance. These findings provide a rationale for important characteristics of the financial environment in Thailand.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-03-06.

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Date of creation: 2003
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Handle: RePEc:fip:fedhwp:wp-03-06
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  1. Thomas Piketty, 1997. "The Dynamics of the Wealth Distribution and the Interest Rate with Credit Rationing," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 173-189.
  2. Paulson, Anna L. & Townsend, Robert, 2004. "Entrepreneurship and financial constraints in Thailand," Journal of Corporate Finance, Elsevier, vol. 10(2), pages 229-262, March.
  3. Christian Ahlin & Robert Townsend, 2002. "Using Repayment Data to Test Across Models of Joint Liability Lending," Vanderbilt University Department of Economics Working Papers 0227, Vanderbilt University Department of Economics.
  4. Christopher Phelan & Robert M Townsend, 2010. "Computing Multi-Period, Information Constrained Optima," Levine's Working Paper Archive 117, David K. Levine.
  5. repec:adr:anecst:y:1994:i:34 is not listed on IDEAS
  6. Alexander Karaivanov, 2003. "Financial Contracts and Occupational Choice," Computing in Economics and Finance 2003 25, Society for Computational Economics.
  7. Jaap H. Abbring & James J. Heckman & Pierre-André Chiappori & Jean Pinquet, 2003. "Adverse Selection and Moral Hazard In Insurance: Can Dynamic Data Help to Distinguish?," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 512-521, 04/05.
  8. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
  9. Huw Lloyd-Ellis & Dan Bernhardt, 2000. "Enterprise, Inequality and Economic Development," Review of Economic Studies, Oxford University Press, vol. 67(1), pages 147-168.
  10. Magnac, Thierry & Robin, Jean-Marc, 1996. "Occupational choice and liquidity constraints," Ricerche Economiche, Elsevier, vol. 50(2), pages 105-133, June.
  11. Christopher Phelan & Robert M. Townsend, 1991. "Computing Multi-Period, Information-Constrained Optima," Review of Economic Studies, Oxford University Press, vol. 58(5), pages 853-881.
  12. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
  13. Andreas Lehnert, 1998. "Asset pooling, credit rationing, and growth," Finance and Economics Discussion Series 1998-52, Board of Governors of the Federal Reserve System (U.S.).
  14. Gine, Xavier & Townsend, Robert M., 2004. "Evaluation of financial liberalization: a general equilibrium model with constrained occupation choice," Journal of Development Economics, Elsevier, vol. 74(2), pages 269-307, August.
  15. Frank A. Wolak, 1994. "An Econometric Analysis of the Asymmetric Information, Regulator-Utility Interaction," Annals of Economics and Statistics, GENES, issue 34, pages 1-12.
  16. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
  17. Holtz-Eakin, Douglas & Joulfaian, David & Rosen, Harvey S, 1994. "Sticking It Out: Entrepreneurial Survival and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 53-75, February.
  18. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  19. Jeremy Greenwood & Boyan Jovanovic, 1989. "Financial Development, Growth, and the Distribution of Income," NBER Working Papers 3189, National Bureau of Economic Research, Inc.
  20. repec:adr:anecst:y:1994:i:34:p:02 is not listed on IDEAS
  21. Robert M. Townsend & Jacob Yaron, 2001. "The credit risk-contingency system of an Asian development bank," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 31-48.
  22. Blanchflower, D.G. & Oswald, A., 1991. "What Makes an Entrepreneur?," Economics Series Working Papers 99125, University of Oxford, Department of Economics.
  23. Heckman, James J & Honore, Bo E, 1990. "The Empirical Content of the Roy Model," Econometrica, Econometric Society, vol. 58(5), pages 1121-49, September.
  24. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-33, March.
  25. Francisco Buera, 2009. "A dynamic model of entrepreneurship with borrowing constraints: theory and evidence," Annals of Finance, Springer, vol. 5(3), pages 443-464, June.
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