Creditor Rights, Inequality and Development in a Neoclassical Growth Model

Benjamin Moll

No 1168, 2009 Meeting Papers from Society for Economic Dynamics

Abstract: I study the implications of the limited enforceability of credit contracts for inequality and economic growth. I introduce limited enforcement into a deterministic neoclassical growth model. Two types of agents differ in their initial wealth, ability and patience and each operate a private firm. The agents can borrow and lend to each other but face enforcement constraints. This results in capital being misallocated across agents. Three main conclusions are obtained from this model. First, capital misallocation disappears in the long run if agents are equally patient. In contrast, if agents' discount rates differ, capital misallocation persists asymptotically. Second, poor creditor rights magnify the effect of heterogeneity in ability on long run wealth inequality, because wealth accumulation functions as a substitute for poor creditor rights. Third, the interest rate is generally lower than in an economy without enforcement constraints.

Date: 2009
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