Contractual Structure and Wealth Accumulation

Dilip Mookherjee and Debraj Ray

American Economic Review, 2002, vol. 92, issue 4, 818-849

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. (D31, D91, I32, O17, Q15)

Date: 2002
Note: DOI: 10.1257/00028280260344489
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Working Paper: Contractual Structure and Wealth Accumulation (2000)
Working Paper: Contractual Structure and Wealth Accumulation (2000)
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