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Contractual Structure and Wealth Accumulation

  • Dilip Mookherjee
  • Debraj Ray

This paper examines incentives of poor agents to escape poverty by saving. Owing to limited liability, low wealth creates borrowing constraints, preventing the poor from being able to finance productive projects. Future wealth increases resulting from current saving would relax these borrowing constraints, raising future productivity and incomes, thus providing a possible channel of upward mobility. However, the extent to which these benefits accrue to the agents themselves depends on the allocation of bargaining power with their lenders (or landlords). If agents have no bargaining power, the returns to saving of poor agents are appropriated entirely by lenders, resulting in poverty traps. In this case the long run wealth distribution becomes polarized into two classes, with no middle class and no interclass mobility. If on the other hand the agents have all the bargaining power then the returns to saving accrue to them entirely, and agents accumulate wealth indefinitely irrespective of initial conditions.

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Paper provided by Boston University, Institute for Economic Development in its series Boston University - Institute for Economic Development with number 107.

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Date of creation: Jun 2000
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Handle: RePEc:fth:bosecd:107
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  1. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  2. Galor, Oded & Zeira, Joseph, 1988. "Income Distribution and Macroeconomics," MPRA Paper 51644, University Library of Munich, Germany, revised 01 Sep 1989.
  3. Mookherjee, Dilip & Ray, Debraj, 2002. "Persistent Inequality," Discussion Paper 57, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
  4. Eswaran, Mukesh & Kotwal, Ashok, 1986. "Access to Capital and Agrarian Production Organisation," Economic Journal, Royal Economic Society, vol. 96(382), pages 482-98, June.
  5. Carter, Michael R. & Zimmerman, Frederick J., 2000. "The dynamic cost and persistence of asset inequality in an agrarian economy," Journal of Development Economics, Elsevier, vol. 63(2), pages 265-302, December.
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  9. Andrew Atkeson & Robert E Lucas, 2010. "On Efficient Distribution with Private Information," Levine's Working Paper Archive 2179, David K. Levine.
  10. 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.
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  13. Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers 40, Institut d'Économie Industrielle (IDEI), Toulouse.
  14. Benabou, Roland, 1996. "Equity and Efficiency in Human Capital Investment: The Local Connection," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 237-64, April.
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  16. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  17. Ray, Debraj & Streufert, Peter A, 1993. "Dynamic Equilibria with Unemployment Due to Undernourishment," Economic Theory, Springer, vol. 3(1), pages 61-85, January.
  18. Basu, Kaushik, 1986. "One Kind of Power," Oxford Economic Papers, Oxford University Press, vol. 38(2), pages 259-82, July.
  19. Aghion, Philippe & Bolton, Patrick, 1997. "A Theory of Trickle-Down Growth and Development," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 151-72, April.
  20. Piketty, Thomas, 1997. "The Dynamics of the Wealth Distribution and the Interest Rate with Credit Rationing," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 173-89, April.
  21. Hoff, Karla & Lyon, Andrew B., 1995. "Non-leaky buckets: Optimal redistributive taxation and agency costs," Journal of Public Economics, Elsevier, vol. 58(3), pages 365-390, November.
  22. Abhijit Banerjee & Dilip Mookherjee & Kaivan Munshi & Debraj Ray, 2001. "Inequality, Control Rights, and Rent Seeking: Sugar Cooperatives in Maharashtra," Journal of Political Economy, University of Chicago Press, vol. 109(1), pages 138-190, February.
  23. Ghatak, M. & Morelli, M. & Sjostrom, T., 2000. "Dynamic Incentives, Occupational Choice, and the American Dream," Papers 1-00-1, Pennsylvania State - Department of Economics.
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  29. repec:fth:bosecd:108 is not listed on IDEAS
  30. Dilip Mookherjee, 1995. "Informational Rents and Property Rights in Land," Boston University - Institute for Economic Development 55, Boston University, Institute for Economic Development.
  31. Shetty, Sudhir, 1988. "Limited liability, wealth differences and tenancy contracts in agrarian economies," Journal of Development Economics, Elsevier, vol. 29(1), pages 1-22, July.
  32. Loury, Glenn C, 1981. "Intergenerational Transfers and the Distribution of Earnings," Econometrica, Econometric Society, vol. 49(4), pages 843-67, June.
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