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Credit Rationing, Wealth Inequality, and Allocation of Talent

Maitreesh Ghatak (), Massimo Morelli and Tomas Sjostrom

No 26, Economics Working Papers from Institute for Advanced Study, School of Social Science

Abstract: We study an economy where agents are heterogeneous in terms of observable wealth and unobservable talent. Adverse selection forces creditors to ask for collateral. We study the two-way interaction between rationing in the credit market and the wages offered in the labor market. Both pooling and separating credit contracts can be offered in equilibrium. The minimum wealth needed to obtain a separating contract is decreasing in the wage, whereas the minimum wealth needed for a pooling contract is increasing in the wage. If the first effect dominates, the derived labor demand can be upward sloping, resulting in the possibility of multiple equilbria.

Keywords: Occupational Choice; Adverse Selection; Wealth Distribution; Credit Rationing (search for similar items in EconPapers)
Date: 2002-10
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Working Paper: Credit Rationing, Wealth Inequality, and Allocation of Talent (2002) Downloads
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