In most contemporary economies loan contracts that mandate exclusionary penalties such as imprisonment or other non-pecuniary punishments for defaulting debtors are illegal, despite the fact that in some cases contracting parties might gain by being able to use them. A possible rationale for contracting restrictions of this type is that exclusion imposes negative externalities on individuals not party to the original loan contract. We explore the ability of such externalities to account for these restrictions. We contrast exclusion with enforceable collateral seizure, a widespread feature of developed financial systems. We also consider “behavioral” agents who underestimate their chances of being punished, and show that overconfidence of this type is a less compelling justification for restrictions on exclusionary punishments than is often argued.

This paper models economic development as a process of institutional transformation by focusing on the interplay between agents' occupational decisions and the distribution of wealth. Because of capital market imperfections, poor agents choose working for a wage over self-employment, and wealthy agents become entrepreneurs who monitor workers. Only with sufficient inequality, however, will there be employment contracts; otherwise, there is either subsistence or self-employment. Thus, in static equilibrium, the occupational structure depends on distribution. Since the latter is itself endogenous, we demonstrate the robustness of this result by extending the model dynamically and studying examples in which initial wealth distributions have long-run effects. In one case the economy develops either widespread cottage industry (self-employment) or factory production (employment contracts), depending on the initial distribution; in the other example, it develops into prosperity or stagnation.

This paper develops the stochastic theory of distribution with a dynamic model which focuses on the role of incomplete insurance in generating inequality. Unlike previous work, our approach takes explicit account of the reason for market incompleteness in modeling agents' behaviour; in particular, the amount of risk borne is endogenous. Using a model of growth with altruism in which agents are risk-averse and there is moral hazard, we show that lineage wealth follows a Markov process which converges globally to an ergodic distribution; this also represents the long-run population distribution of wealth. We discuss the role of particular assumptions, such as availability of production loans and unboundedness of utility, in yielding the qualitative properties of the distribution of wealth, the choice of “occupation” and the prevention of poverty traps.

This paper models economic development as a process of institutional transformation by focusing on the interplay between agents' occupational decisions and the distribution of wealth. Becau se of capital-market imperfections, poor agents choose working for a wa ge over self-employment and wealthy agents become entrepreneurs who monitor workers. Only with sufficient inequality, however, will ther e be employment contracts; otherwise, there is either subsistence or self-employment. Thus, in static equilibrium, the occupational structure depends on distribution. Since the latter is itself endogenous, the authors demonstrate the robustness of this result b y extending the model dynamically and studying examples in which initi al wealth distributions have long-run effects.

We study frictionless matching in large economies with and without market imperfections, providing sufficient conditions for monotone matching that are weaker than those previously known. Necessary conditions, which depend on a key analytical object we call the surplus function, are also offered. Changes in the surplus yield valuable information about the comparative statics of matching patterns across environments. We apply our framework to some examples adapted from the literature, accounting for and extending several comparative-static and welfare results. We also explore the dependence of the matching pattern on the type distribution.

This article presents a perfectly competitive model of firm boundary decisions and study their interplay with product demand, technology, and welfare. Integration is privately costly but is effective at coordinating production decisions; nonintegration is less costly but coordinates relatively poorly. Output price influences the choice of ownership structure: integration increases with the price level. At the same time, ownership affects output, because integration is more productive than nonintegration. For a generic set of demand functions, equilibrium delivers heterogeneity of ownership and performance among ex ante identical enterprises. The price mechanism transmutes demand shifts into industry-wide reorganizations and generates external effects from technological shocks: productivity changes in some firms may induce ownership changes in others. If the enterprise managers have full title to its revenues, market equilibrium ownership structures are second-best efficient. When managers have less than full revenue claims, equilibrium can be inefficient, with too little integration.

We examine the interactions between different institutional arrangements in a general equilibrium model of a modernizing economy. There is a modern sector, where productivity is high but information asymmetries are large, and a traditional sector where productivity is low but information asymmetries are small. Consequently, agency costs in the modern sector make consumption lending difficult, while such lending is readily done in the traditional sector. The resulting trade-off between credit availability and productivity implies that not everyone will move to the modern sector. In fact, the laissez-faire level of modernization may fail to maximize net social surplus. This situation may also hold in the long run: in a dynamic version of the model, a “trickle-down” effect links the process of modernization with reduction in modern sector agency costs. This effect may be too weak and the economy may get stuck in a trap and never fully modernize. The two-sector structure also yields a natural theoretical testing ground for the Kuznets inverted-U hypothesis: we show that even within the “sectoral shifting” class of models, this phenomenon is not robust to small changes in model specification.

We present sufficient conditions for monotone matching in environments where utility is not fully transferable between partners. These conditions involve not only complementarity in types of the total payoff to a match, as in the transferable utility case, but also monotonicity in type of the degree of transferability between partners. We apply our conditions to study some models of risk sharing and incentive problems, deriving new results for predicted matching patterns in those contexts.