American Economic Review Vol. 92 No. 4 2002

Contractual Structure and Wealth Accumulation

Dilip Mookherjee¹; Debraj Ray²

¹ Department of Economics, Boston University, 270 Bay State Road, Boston, MA 02215. · ² Department of Economics, New York University, 269 Mercer Street, 7th Floor, New York, NY 10003.

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.

DOI

10.1257/00028280260344489

Volume

92

Issue

4

Pages

818-849

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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