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Profit Sharing, Income Inequality and Capital Accumulation

  • Nabi, Mahmoud Sami
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    The relationship between economic development and income inequality is not neutral vis-à-vis the role of the financial system in responding to the needs of different categories of agents. Indeed, as shown by the literature of the persistent inequality (e.g. Banarjee and Newman, 1993; Piketty, 1997), taking in account the asymmetric impact of the financial imperfections on wealthy and poor agents changes the pace of the Kuznets (1955) relationship between economic development and income inequality. In this paper we try to analyze the effect of introducing profit-sharing financial contract between banks and entrepreneurs on the evolution of the capital accumulation/income inequality relationship. It is interestingly shown that income inequality disappears when the economy reaches a second stage of development.

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    File URL: http://mpra.ub.uni-muenchen.de/49830/1/MPRA_paper_49830.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 49830.

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    Date of creation: Apr 2012
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    Handle: RePEc:pra:mprapa:49830
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    1. 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.
    2. Mahmoud Sami Nabi, 2009. "Financial Imperfections, Inequality and Capital Accumulation," Economics Bulletin, AccessEcon, vol. 29(3), pages 2388-2403.
    3. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
    4. 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.
    5. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
    6. Abbas Mirakhor & Mohsin S. Khan, 1991. "Islamic Banking," IMF Working Papers 91/88, International Monetary Fund.
    7. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
    8. Stewart, Geoff, 1989. "Profit-sharing in cournot oligopoly," Economics Letters, Elsevier, vol. 31(3), pages 221-224, December.
    9. Perotti, Roberto, 1996. " Growth, Income Distribution, and Democracy: What the Data Say," Journal of Economic Growth, Springer, vol. 1(2), pages 149-87, June.
    10. 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.
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