Skip to main content Accessibility help
×
Home
Hostname: page-component-6c8bd87754-ncgjf Total loading time: 0.225 Render date: 2022-01-17T11:28:56.458Z Has data issue: true Feature Flags: { "shouldUseShareProductTool": true, "shouldUseHypothesis": true, "isUnsiloEnabled": true, "metricsAbstractViews": false, "figures": true, "newCiteModal": false, "newCitedByModal": true, "newEcommerce": true, "newUsageEvents": true }

ENDOGENOUS BORROWING CONSTRAINTS AND WEALTH INEQUALITY

Published online by Cambridge University Press:  29 March 2016

Joydeep Bhattacharya
Affiliation:
Iowa State University
Xue Qiao
Affiliation:
Tsinghua University
Min Wang*
Affiliation:
Peking University
*
Address correspondence to: Min Wang, China Center for Economic Research, National School of Development, Peking University, Beijing 100871, China; email: wangmin@nsd.pku.edu.cn.

Abstract

This paper studies the evolution of wealth inequality in an economy with endogenous borrowing constraints. In the model economy, young agents need to borrow to finance human capital investments but cannot commit to repaying their loans. Creditors can punish defaulters by banishing them permanently from the credit market. At equilibrium, loan default is prevented by imposing a borrowing limit tied to the borrower's inheritance. The heterogeneity in inheritances translates into heterogeneity in borrowing limits: endogenously, some borrowers face a zero borrowing limit, and some are partly constrained, whereas others are unconstrained. Depending on the initial distribution of inheritances, it is possible that all lineages are attracted either to the zero-borrowing-limit steady state or to the unconstrained-borrowing steady state—long-run equality. It is also possible that some lineages end up in one steady state and the rest in the other—complete polarization.

Type
Articles
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aghion, Philippe and Bolton, Patrick (1997) A theory of trickle-down growth and development. Review of Economic Studies 64, 151172.CrossRefGoogle Scholar
Andolfatto, David and Gervais, Martin (2006) Human capital investment and debt constraints. Review of Economic Dynamics 9 (1), 5267.CrossRefGoogle Scholar
Azariadis, Costas and Kaas, Leo (2008) Credit and growth under limited commitment. Macroeconomic Dynamics 12 (S1), 2030.CrossRefGoogle Scholar
Azariadis, Costas and Lambertini, Luisa (2003) Endogenous debt constraints in life-cycle economies. Review of Economic Studies 70 (3), 461487.CrossRefGoogle Scholar
Banerjee, Abhijit V. and Newman, Andrew F. (1991) Risk-bearing and the theory of income distribution. Review of Economic Studies 58, 211235.CrossRefGoogle Scholar
Bhattacharya, Joydeep (1998) Credit market imperfections, income distribution, and capital accumulation, Economic Theory 11 (1), 171200.CrossRefGoogle Scholar
Cagetti, Marco and De Nardi, Mariacristina (2008) Wealth inequality: Data and models. Macroeconomic Dynamics 2012 (S2), 285313.Google Scholar
Cartiglia, Filippo (1997) Credit constraints and human capital accumulation in the open economy. Journal of International Economics 43 (1–2), 221236.CrossRefGoogle Scholar
Chakraborty, Shankha and Das, Mausumi (2005) Mortality, human capital and persistent inequality. Journal of Economic Growth 10 (2), 159192.CrossRefGoogle Scholar
De Gregorio, Jose (1996) Borrowing constraints, human capital accumulation and growth. Journal of Monetary Economics 37 (1), 4971.CrossRefGoogle Scholar
De la Croix, David and Michel, Philippe (2007) Education and growth with endogenous debt constraints. Economic Theory 33 (3), 509530.CrossRefGoogle Scholar
Freeman, Scott (1996) Equilibrium income inequality among identical agents. Journal of Political Economy 104 (5), 10471064.CrossRefGoogle Scholar
Galor, Oded (1996) Convergence? Inferences from theoretical models. Economic Journal 106, 10561069.CrossRefGoogle Scholar
Galor, Oded and Moav, Omer (2004) From physical to human capital accumulation: Inequality and the process of development. Review of Economic Studies 71 (4), 10011026.CrossRefGoogle Scholar
Galor, Oded and Zeira, Joseph (1993) Income distribution and macroeconomics. Review of Economic Studies 60 (1), 3552.CrossRefGoogle Scholar
Jacobs, Bas and Yang, Hongyan (2013) Second-Best Income Taxation with Endogenous Human Capital and Borrowing Constraints. CESifo working paper: public finance, No. 4155.Google Scholar
Kass, Leo and Zink, Stefan (2007) Human capital and growth cycles. Economic Theory 31 (1), 1933.CrossRefGoogle Scholar
Kehoe, Timothy J. and Levine, David K. (1993) Debt-constrained asset markets. Review of Economic Studies 60 (4), 865888.CrossRefGoogle Scholar
Kitaura, Koji (2012) Education, borrowing constraints and growth. Economics Letters 116 (3), 575578.CrossRefGoogle Scholar
Lochner, Lance J. and Monge-Naranjo, Alexander (2011) The nature of credit constraints and human capital. American Economic Review 101 (6), 24872529.CrossRefGoogle Scholar
McDonald, Stuart and Zhang, Jie (2012) Income inequality and economic growth with altruistic bequests and human capital investment. Macroeconomic Dynamics 16 (S3), 331354.CrossRefGoogle Scholar
Mookherjee, Dilip and Ray, Debraj (2003) Persistent inequality. Review of Economic Studies 70 (2), 369393.CrossRefGoogle Scholar
Piketty, Thomas (1997) The dynamics of the wealth distribution and the interest rate with credit rationing. Review of Economic Studies 64 (2), 173189.CrossRefGoogle Scholar
Sarigiannidou, Maria and Palivos, Theodore (2012) A Modern Theory of Kuznets' Hypothesis. Texas Christian University Department of Economics working paper 12-02.Google Scholar
Wang, Min (2014) Optimal education policies under endogenous borrowing constraints. Economic Theory 55 (1), 135159.CrossRefGoogle Scholar
Supplementary material: PDF

Bhattacharya supplementary material

Bhattacharya supplementary material 1

Download Bhattacharya supplementary material(PDF)
PDF 60 KB
2
Cited by

Send article to Kindle

To send this article to your Kindle, first ensure no-reply@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle. Find out more about sending to your Kindle.

Note you can select to send to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

ENDOGENOUS BORROWING CONSTRAINTS AND WEALTH INEQUALITY
Available formats
×

Send article to Dropbox

To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Dropbox.

ENDOGENOUS BORROWING CONSTRAINTS AND WEALTH INEQUALITY
Available formats
×

Send article to Google Drive

To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Google Drive.

ENDOGENOUS BORROWING CONSTRAINTS AND WEALTH INEQUALITY
Available formats
×
×

Reply to: Submit a response

Please enter your response.

Your details

Please enter a valid email address.

Conflicting interests

Do you have any conflicting interests? *