Contractual Structure and Wealth Accumulation

Author:

Mookherjee Dilip1,Ray Debraj2

Affiliation:

1. Department of Economics, Boston University, 270 Bay State Road, Boston, MA 02215.

2. Department of Economics, New York University, 269 Mercer Street, 7th Floor, New York, NY 10003.

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.

Publisher

American Economic Association

Subject

Economics and Econometrics

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