Enterprise, Inequality and Economic Development
We develop a dynamic general equilibrium model of economics development with altruism in which the evolution of the extent of entrepreneurship, the rate of rural-urban migration, the scale and structure of production and the degree of income and wealth inequality are endogenously determined. The model generates a development process that has distributional characteristics consistent with those of the Kuznets hypothesis. In early stages of development agents face binding financing constraints so that production is only carried out on a small scale. Few agents earn entrepreneurial profits and the lack of competition for labor keeps the wage low. The scale of production gradually expands as the descendants of entrepreneurs face less stringent financing constraints. Income and wealth inequality become increasingly acute as the entrepreneurial rich get richer and the poor remain so. Eventually, competition for workers drives up wages. As the labor share of income rises, the quality of entrepreneurs improves and the scale of production and the profits of an entrepreneur, controlling for wealth and ability, fall. Consequently, as the development process continues, income and wealth disparities eventually decline. With no engine for technological advancement, the economy converges to an invariant, non-degenerate wealth and income distribution. The economy may even be asymptotically efficient, as the "right" entrepreneurs take on investment projects. We derive the time path of the optimal redistribution policy and detail the impact of aggregate shocks at different stages. Finally, we provide insight into why the "Kuznets curve" may appear in some economies but not in others, and how long-run fluctuations in economic activity can arise endogenously.
|Date of creation:||Dec 1993|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (613) 533-2250
Fax: (613) 533-6668
Web page: http://qed.econ.queensu.ca/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Greenwood, J. & Jovanovic, B., 1988.
"Financial Development, Growth, And The Distribution Of Income,"
RCER Working Papers
131, University of Rochester - Center for Economic Research (RCER).
- Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
- Greenwood, Jeremy & Jovanovic, Boyan, 1988. "Financial Development, Growth, And The Distribution Of Income," Working Papers 88-12, C.V. Starr Center for Applied Economics, New York University.
- Greenwood, J. & Jovanovic, B., 1990. "Financial Development, Growth, And The Distribution Of Income," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9002, University of Western Ontario, The Centre for the Study of International Economic Relations.
- Jeremy Greenwood & Boyan Jovanovic, 1989. "Financial Development, Growth, and the Distribution of Income," NBER Working Papers 3189, National Bureau of Economic Research, Inc.
- Galor, Oded & Zeira, Joseph, 1993.
"Income Distribution and Macroeconomics,"
Review of Economic Studies,
Wiley Blackwell, vol. 60(1), pages 35-52, January.
- Alwyn Young, 1993. "Lessons from the East Asian NICs: A Contrarian View," NBER Working Papers 4482, National Bureau of Economic Research, Inc.
- Dani Rodrik, 1994. "Getting Interventions Right: How South Korea and Taiwan Grew Rich," NBER Working Papers 4964, National Bureau of Economic Research, Inc.
- Ahluwalia, Montek S, 1976. "Income Distribution and Development: Some Stylized Facts," American Economic Review, American Economic Association, vol. 66(2), pages 128-35, May.
- Hopenhayn, Hugo A & Prescott, Edward C, 1992. "Stochastic Monotonicity and Stationary Distributions for Dynamic Economies," Econometrica, Econometric Society, vol. 60(6), pages 1387-406, November.
- Hadar, Josef & Russell, William R., 1971. "Stochastic dominance and diversification," Journal of Economic Theory, Elsevier, vol. 3(3), pages 288-305, September.
- Andreoni, James, 1989. "Giving with Impure Altruism: Applications to Charity and Ricardian Equivalence," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1447-58, December.
- Summers, Robert & Kravis, Irving B. & Heston, Alan, 1984. "Changes in the world income distribution," Journal of Policy Modeling, Elsevier, vol. 6(2), pages 237-269, May.
- Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
When requesting a correction, please mention this item's handle: RePEc:qed:wpaper:893. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Babcock)
If references are entirely missing, you can add them using this form.