Hostname: page-component-cd9895bd7-dzt6s Total loading time: 0 Render date: 2024-12-23T07:00:34.929Z Has data issue: false hasContentIssue false
  • English
  • Français

ENDOGENOUS BORROWING CONSTRAINTS AND WEALTH INEQUALITY

Published online by Cambridge University Press:  29 March 2016

Joydeep Bhattacharya ,
Xue Qiao  and
Min Wang
Joydeep Bhattacharya
Affiliation:
Iowa State University
Xue Qiao
Affiliation:
Tsinghua University
Min Wang*
Affiliation:
Peking University
*
Address correspondence to: Min Wang, China Center for Economic Research, National School of Development, Peking University, Beijing 100871, China; email: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper studies the evolution of wealth inequality in an economy with endogenous borrowing constraints. In the model economy, young agents need to borrow to finance human capital investments but cannot commit to repaying their loans. Creditors can punish defaulters by banishing them permanently from the credit market. At equilibrium, loan default is prevented by imposing a borrowing limit tied to the borrower's inheritance. The heterogeneity in inheritances translates into heterogeneity in borrowing limits: endogenously, some borrowers face a zero borrowing limit, and some are partly constrained, whereas others are unconstrained. Depending on the initial distribution of inheritances, it is possible that all lineages are attracted either to the zero-borrowing-limit steady state or to the unconstrained-borrowing steady state—long-run equality. It is also possible that some lineages end up in one steady state and the rest in the other—complete polarization.

Keywords

Wealth InequalityEducationEndogenous Borrowing ConstraintsExclusion
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 6 , September 2016 , pp. 1413 - 1431
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Aghion, Philippe and Bolton, Patrick (1997) A theory of trickle-down growth and development. Review of Economic Studies 64, 151–172.CrossRefGoogle Scholar
Andolfatto, David and Gervais, Martin (2006) Human capital investment and debt constraints. Review of Economic Dynamics 9 (1), 52–67.Google Scholar
Azariadis, Costas and Kaas, Leo (2008) Credit and growth under limited commitment. Macroeconomic Dynamics 12 (S1), 20–30.Google Scholar
Azariadis, Costas and Lambertini, Luisa (2003) Endogenous debt constraints in life-cycle economies. Review of Economic Studies 70 (3), 461–487.Google Scholar
Banerjee, Abhijit V. and Newman, Andrew F. (1991) Risk-bearing and the theory of income distribution. Review of Economic Studies 58, 211–235.Google Scholar
Bhattacharya, Joydeep (1998) Credit market imperfections, income distribution, and capital accumulation, Economic Theory 11 (1), 171–200.Google Scholar
Cagetti, Marco and De Nardi, Mariacristina (2008) Wealth inequality: Data and models. Macroeconomic Dynamics 2012 (S2), 285–313.Google Scholar
Cartiglia, Filippo (1997) Credit constraints and human capital accumulation in the open economy. Journal of International Economics 43 (1–2), 221–236.CrossRefGoogle Scholar
Chakraborty, Shankha and Das, Mausumi (2005) Mortality, human capital and persistent inequality. Journal of Economic Growth 10 (2), 159–192.Google Scholar
De Gregorio, Jose (1996) Borrowing constraints, human capital accumulation and growth. Journal of Monetary Economics 37 (1), 49–71.Google Scholar
De la Croix, David and Michel, Philippe (2007) Education and growth with endogenous debt constraints. Economic Theory 33 (3), 509–530.CrossRefGoogle Scholar
Freeman, Scott (1996) Equilibrium income inequality among identical agents. Journal of Political Economy 104 (5), 1047–1064.Google Scholar
Galor, Oded (1996) Convergence? Inferences from theoretical models. Economic Journal 106, 1056–1069.Google Scholar
Galor, Oded and Moav, Omer (2004) From physical to human capital accumulation: Inequality and the process of development. Review of Economic Studies 71 (4), 1001–1026.Google Scholar
Galor, Oded and Zeira, Joseph (1993) Income distribution and macroeconomics. Review of Economic Studies 60 (1), 35–52.Google Scholar
Jacobs, Bas and Yang, Hongyan (2013) Second-Best Income Taxation with Endogenous Human Capital and Borrowing Constraints. CESifo working paper: public finance, No. 4155.Google Scholar
Kass, Leo and Zink, Stefan (2007) Human capital and growth cycles. Economic Theory 31 (1), 19–33.Google Scholar
Kehoe, Timothy J. and Levine, David K. (1993) Debt-constrained asset markets. Review of Economic Studies 60 (4), 865–888.Google Scholar
Kitaura, Koji (2012) Education, borrowing constraints and growth. Economics Letters 116 (3), 575–578.Google Scholar
Lochner, Lance J. and Monge-Naranjo, Alexander (2011) The nature of credit constraints and human capital. American Economic Review 101 (6), 2487–2529.CrossRefGoogle Scholar
McDonald, Stuart and Zhang, Jie (2012) Income inequality and economic growth with altruistic bequests and human capital investment. Macroeconomic Dynamics 16 (S3), 331–354.Google Scholar
Mookherjee, Dilip and Ray, Debraj (2003) Persistent inequality. Review of Economic Studies 70 (2), 369–393.Google Scholar
Piketty, Thomas (1997) The dynamics of the wealth distribution and the interest rate with credit rationing. Review of Economic Studies 64 (2), 173–189.Google Scholar
Sarigiannidou, Maria and Palivos, Theodore (2012) A Modern Theory of Kuznets' Hypothesis. Texas Christian University Department of Economics working paper 12-02.Google Scholar
Wang, Min (2014) Optimal education policies under endogenous borrowing constraints. Economic Theory 55 (1), 135–159.Google Scholar
Supplementary material: PDF

Bhattacharya supplementary material

Bhattacharya supplementary material 1

Download Bhattacharya supplementary material(PDF)
PDF 59.8 KB