Unemployment, credit rationing, and capital accumulation: a tale of two frictions

Caroline Marie Betts and Joydeep Bhattacharya ()

Economic Theory, 1998, vol. 12, issue 3, pages 489-517

Abstract: This paper develops a model in which two information frictions are embedded into an otherwise conventional neoclassical growth model; an adverse selection problem in the labor market and a costly state verification problem in the credit market. The former allows equilibrium unemployment to arise endogenously while the latter is responsible for equilibrium credit rationing. This structure is used to investigate a theoretical link between the level of unemployment and the extent of credit rationing (and capital formation). The presence of the labor market friction is enough to generate scope for multiple steady state equilibria. The model also generates a large class of endogenous cyclical and chaotic dynamical equilibria. Development trap phenomena may also appear.

Keywords: Unemployment; ·; Credit; rationing; ·; Cycles; ·; Chaos. (search for similar items in EconPapers)
JEL-codes: E13 J6 J2 (search for similar items in EconPapers)
Date: 1998-10-13
Note: Received: April 10, 1998; revised version: May 20, 1998
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Working Paper: Unemployment, Credit Rationing, and Capital Accumulation: A Tale of Two Frictions (2002)
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