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American Economic Review: Vol. 92 No. 4 (September 2002)

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Contractual Structure and Wealth Accumulation

Article Citation

Mookherjee, Dilip, and Debraj Ray. 2002. "Contractual Structure and Wealth Accumulation ." American Economic Review, 92(4): 818-849.

DOI: 10.1257/00028280260344489

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, I32, O17, Q15)

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Mookherjee, Dilip
Ray, Debraj


American Economic Review


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