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Inequality, Credit Market Imperfection, Segmentation and Economic Growth

Listed author(s):
  • Zhu, D.

    (Tilburg University, Center For Economic Research)

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    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.

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    File URL: https://pure.uvt.nl/portal/files/539503/58.pdf
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    Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2001-58.

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    Date of creation: 2001
    Handle: RePEc:tiu:tiucen:b7b3803f-8dd2-48a5-8261-ceab4c2de0d7
    Contact details of provider: Web page: http://center.uvt.nl

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    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. 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.
    3. 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.
    4. Oded Galor & Joseph Zeira, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Oxford University Press, vol. 60(1), pages 35-52.
    5. 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.
    6. Roland Bénabou, 1996. "Inequality and Growth," NBER Chapters,in: NBER Macroeconomics Annual 1996, Volume 11, pages 11-92 National Bureau of Economic Research, Inc.
    7. 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.
    8. Granger, Clive W. J. & Uhlig, Harald F., 1990. "Reasonable extreme-bounds analysis," Journal of Econometrics, Elsevier, vol. 44(1-2), pages 159-170.
    9. Sala-i-Martin, Xavier, 1997. "I Just Ran Two Million Regressions," American Economic Review, American Economic Association, vol. 87(2), pages 178-183, May.
    10. 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.
    11. Robert M. Townsend, 1995. "Financial Systems in Northern Thai Villages," The Quarterly Journal of Economics, Oxford University Press, vol. 110(4), pages 1011-1046.
    12. 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.
    13. repec:dau:papers:123456789/10096 is not listed on IDEAS
    14. Bose, Pinaki, 1998. "Formal-informal sector interaction in rural credit markets," Journal of Development Economics, Elsevier, vol. 56(2), pages 265-280, August.
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