Contractual structure and wealth accumulation

Dilip Mookherjee, Debraj Ray

    Research output: Contribution to journalArticle

    Abstract

    Can historical wealth distributions affect long-run output and inequality despite "rational" saving, convex technology and no externalities? We consider a model of equilibrium short-period financial contracts, where poor agents face credit constraints owing to moral hazard and limited liability. If agents have no bargaining power, poor agents have no incentive to save: poverty traps emerge and agents are polarized into two classes, with no interclass mobility. If instead agents have all the bargaining power, strong saving incentives are generated: the wealth of poor and rich agents alike drift upward indefinitely and "history" does not matter eventually. (D31, D91, 132, O17, Q15).

    Original languageEnglish (US)
    Pages (from-to)818-849
    Number of pages32
    JournalAmerican Economic Review
    Volume92
    Issue number4
    DOIs
    StatePublished - Sep 1 2002

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    ASJC Scopus subject areas

    • Economics and Econometrics

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