IDEAS home Printed from https://ideas.repec.org/p/tiu/tiucen/b7b3803f-8dd2-48a5-8261-ceab4c2de0d7.html
   My bibliography  Save this paper

Inequality, Credit Market Imperfection, Segmentation and Economic Growth

Author

Listed:
  • Zhu, D.

    (Tilburg University, Center For Economic Research)

Abstract

This paper investigates how initial inequality can causally affect economic growth when moral hazard problems exist in credit markets.Two regimes of the credit markets aiming at overcoming the moral hazard problems are analyzed.The formal one such as bank relies on intermediary between borrowers and lenders by asking for collateral.The informal one relies on direct yet costly monitoring by the lenders themselves.However, from the social point of view both of them are unfavorable to certain segments of the agents in this heterogenous economy in terms of whether the individual potential productivity could be fully realized. Consequently, the permission of the coexistence of these two regimes could be growth enhancing.The dynamic rise and fall of the formal and informal regimes are implied along the growth process of per capita income.In the empirical part, the negative relationship between initial inequality and long run growth is discovered, using cross-province data in rural China rather than more often used cross-country data sets in literature.Interestingly, the policy dummy variable telling the permission or forbidding of the informal regime presents a positive sign.Both of these two results support our theoretical model empirically. Finally, we argue that this channel to bridge inequality and economic growth is more rural specific.

Suggested Citation

  • Zhu, D., 2001. "Inequality, Credit Market Imperfection, Segmentation and Economic Growth," Discussion Paper 2001-58, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:b7b3803f-8dd2-48a5-8261-ceab4c2de0d7
    as

    Download full text from publisher

    File URL: https://pure.uvt.nl/portal/files/539503/58.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Valerie R. Bencivenga & Bruce D. Smith, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 195-209.
    2. 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.
    3. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 663-691.
    4. Levine, Ross & Zervos, Sara J, 1993. "What We Have Learned about Policy and Growth from Cross-Country Regressions?," American Economic Review, American Economic Association, vol. 83(2), pages 426-430, May.
    5. Sala-i-Martin, Xavier, 1997. "I Just Ran Two Million Regressions," American Economic Review, American Economic Association, pages 178-183.
    6. Granger, Clive W. J. & Uhlig, Harald F., 1990. "Reasonable extreme-bounds analysis," Journal of Econometrics, Elsevier, vol. 44(1-2), pages 159-170.
    7. Roland Bénabou, 1996. "Inequality and Growth," NBER Chapters,in: NBER Macroeconomics Annual 1996, Volume 11, pages 11-92 National Bureau of Economic Research, Inc.
    8. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-963, September.
    9. Oded Galor & Joseph Zeira, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 35-52.
    10. repec:dau:papers:123456789/10096 is not listed on IDEAS
    11. Bose, Pinaki, 1998. "Formal-informal sector interaction in rural credit markets," Journal of Development Economics, Elsevier, pages 265-280.
    12. Josef Falkinger & Josef Zweimüller, 1997. "The Impact of Income Inequality on Product Diversity and Economic Growth," Metroeconomica, Wiley Blackwell, vol. 48(3), pages 211-237, October.
    13. Robert M. Townsend, 1995. "Financial Systems in Northern Thai Villages," The Quarterly Journal of Economics, Oxford University Press, vol. 110(4), pages 1011-1046.
    14. Philippe Aghion & Even Caroli & Cecilia Garcia-Penalosa, 1998. "Uncovering some causal relationships between inequality and economic growth," IFS Working Papers W98/02, Institute for Fiscal Studies.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    inequality; credit markets; moral hazard; economic growth;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tiu:tiucen:b7b3803f-8dd2-48a5-8261-ceab4c2de0d7. 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: (Richard Broekman). General contact details of provider: http://center.uvt.nl .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.