Economic inequality is of interest not only at some intrinsic level, but also for its close connections to diverse variables, ranging from economic indicators such as growth rates to sociopolitical outcomes such as collective action and conflict.It is only natural, then, to study the evolution of inequality in an economic system.It is fair to say that the dominant view on this topic is that inequality is the outcome of a constant battle between convergence and "luck" (Gary Becker and Nigel Tomes, 1979).Current asset inequalities may echo into the future, but their natural tendency is to die out (owing to a convex investment technology).Disparities are only sustained through ongoing stochastic shocks (see also David Champernowne, 1953;Glenn Loury, 1981).A second approach emphasizes that initial conditions determine final outcomes, owing principally to a nonconvex investment technology (see e.g.

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.