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  3. American Economic Review
  4. September 2002
  5. Contractual Structure and Wealth Accumulation

Contractual Structure and Wealth Accumulation

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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)

Citation

Mookherjee, Dilip, and Debraj Ray. 2002. "Contractual Structure and Wealth Accumulation ." American Economic Review, 92 (4): 818-849. DOI: 10.1257/00028280260344489

JEL Classification

  • D31 Personal Income, Wealth, and Their Distributions
  • I32 Measurement and Analysis of Poverty
  • D91 Intertemporal Household Choice; Life Cycle Models and Saving
  • O16 Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
  • O17 Formal and Informal Sectors; Shadow Economy; Institutional Arrangements