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Wealth Inequality and the Losses from Financial Frictions


  • Joaquin Blaum



Does wealth inequality exacerbate or alleviate the degree of misallocation in an economy where financial markets are imperfect? To address this question, I exploit the idea that inequality should have a different effect across sectors. Using a difference-in-difference strategy, I show that sectors that are more in need of external finance are relatively smaller in countries with higher income inequality. To rationalize this fact, I build a model in which sectors differ in their fixed cost requirement, agents face collateral constraints, and production is subject to decreasing returns. The model features key elements from the literature on financial frictions and economic development. I calibrate the model to match standard moments of the US economy. The calibrated model is consistent with the documented facts on inequality and cross-sector outcomes. At the calibrated parameters, wealth inequality exacerbates the effect of financial frictions on the economy. Quantitatively, an increase in wealth inequality that is consistent with an increase in income inequality of 15 points in Gini generates losses of 46 percent of per capita income.

Suggested Citation

  • Joaquin Blaum, 2012. "Wealth Inequality and the Losses from Financial Frictions," 2012 Meeting Papers 1077, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:1077

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    References listed on IDEAS

    1. Blanchflower, D. & Oswald, A., 1990. "What Makes A Young Entrepreneur?," Papers 373, London School of Economics - Centre for Labour Economics.
    2. Deininger, Klaus & Squire, Lyn, 1996. "A New Data Set Measuring Income Inequality," World Bank Economic Review, World Bank Group, vol. 10(3), pages 565-591, September.
    3. Klass, Oren S. & Biham, Ofer & Levy, Moshe & Malcai, Ofer & Solomon, Sorin, 2006. "The Forbes 400 and the Pareto wealth distribution," Economics Letters, Elsevier, vol. 90(2), pages 290-295, February.
    4. 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.
    5. Hyeok Jeong & Robert Townsend, 2007. "Sources of TFP growth: occupational choice and financial deepening," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 32(1), pages 179-221, July.
    6. Perotti, Roberto, 1996. "Growth, Income Distribution, and Democracy: What the Data Say," Journal of Economic Growth, Springer, vol. 1(2), pages 149-187, June.
    7. Kristin J. Forbes, 2000. "A Reassessment of the Relationship between Inequality and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 869-887, September.
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    Cited by:

    1. Ricardo Bebczuk & Eduardo Cavallo, 2016. "Is business saving really none of our business?," Applied Economics, Taylor & Francis Journals, vol. 48(24), pages 2266-2284, May.
    2. Roxana GutiƩrrez-Romero, 2017. "How does inequality affect long-run growth?," Working Papers 84, Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research.
    3. Ricardo N. Bebczuk & Eduardo A. Cavallo, 2014. "Is Business Saving Really None of Our Business?," IDB Publications (Working Papers) 6554, Inter-American Development Bank.
    4. Izabela Karpowicz, 2016. "Financial Inclusion, Growth and Inequality: A Model Application to Colombia," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(6), pages 68-89, June.
    5. Era Dabla-Norris & Yixi Deng & Anna Ivanova & Izabela Karpowicz & Filiz D Unsal & Eva VanLeemput & Joyce Wong, 2015. "Financial Inclusion; Zooming in on Latin America," IMF Working Papers 15/206, International Monetary Fund.
    6. Minsoo Han, 2013. "Capital Account Openness and the Losses from Financial Frictions," 2013 Meeting Papers 485, Society for Economic Dynamics.

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