Equity and Efficiency under Imperfect Credit Markets

Reto Foellmi and Manuel Oechslin ()

No 265, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: Recent macroeconomic research discusses credit market imperfections as a key channel through which inequality retards growth. Limited borrowing prevents the less affluent individuals from investing the efficient amount, and the inefficiencies are considered to become stronger as inequality rises. This paper, though, argues that higher inequality may actually boost aggregate output even with convex technologies and limited borrowing. Less equality in the middle or at the top end of the distribution is associated with a lower borrowing rate and hence better access to credit for the poor. We find, however, that rising relative poverty is unambiguously bad for economic performance. Hence, we suggest that future empirical work on the inequality-growth nexus should use more specific measures of inequality rather than measures of �overall� inequality such as the Gini index.

Keywords: capital market imperfections; inequality; growth; efficiency (search for similar items in EconPapers)
JEL-codes: F13 O11 O16 (search for similar items in EconPapers)
Date: 2006-01
New Economics Papers: this item is included in nep-cfn, nep-dev and nep-fmk
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Working Paper: Equity and Efficiency under Imperfect Credit Markets (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:iewwpx:265

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