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Creditor protection and the dynamics of the distribution in oligarchic societies

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  • Manuel Oechslin

Abstract

This paper introduces credit market imperfections and barriers to entrepreneurship into the Ramsey growth model. It is assumed that only a small elite, the oligarchs, may run firms and that these oligarchs � when borrowing from workers � may renege on the debt contracts at low cost. In such an economy, poor contract enforcement slows down the transition towards the steady state and alters the dynamics of the distribution strongly in favour of the oligarchs. The reason is that the workers are forced to charge �low� borrowing rates in order to decrease the incumbents� incentives to default. With dynastic preferences, low returns reduce the workers� propensity to save; they discount future wages less and consume more out of current income. Calibrations of the model suggest that the elite�s welfare gains are large � even if the oligarchic structure were associated with substantially lower productivity growth rates. These findings point to political forces behind low financial development.
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  • Manuel Oechslin, 2009. "Creditor protection and the dynamics of the distribution in oligarchic societies," Journal of Economic Growth, Springer, vol. 14(4), pages 313-344, December.
    • Handle: RePEc:kap:jecgro:v:14:y:2009:i:4:p:313-344
    DOI: 10.1007/s10887-009-9047-9
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    2. Kebede, Jeleta & Selvanathan, Saroja & Naranpanawa, Athula, 2021. "Foreign bank presence, institutional quality, and financial inclusion: Evidence from Africa," Economic Modelling, Elsevier, vol. 102(C).
    3. Guanchun Liu & Yuanyuan Liu & Chengsi Zhang, 2017. "Financial Development, Financial Structure and Income Inequality in China," The World Economy, Wiley Blackwell, vol. 40(9), pages 1890-1917, September.
    4. Kim, Dong-Hyeon & Lin, Shu-Chin, 2011. "Nonlinearity in the financial developmentâincome inequality nexus," Journal of Comparative Economics, Elsevier, vol. 39(3), pages 310-325, September.
    5. Kebede, Jeleta & Naranpanawa, Athula & Selvanathan, Saroja, 2023. "Financial inclusion and income inequality nexus: A case of Africa," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 539-557.
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    7. Li, Shuai & Zhan, Shuwei & Zhan, Shurui & Zhan, Minghua, 2023. "How does financial development change the effect of the bank lending channel of monetary policy in developing countries?—Evidence from China," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 502-519.

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    More about this item

    Keywords

    Contract enforcement; Wealth distribution; Economic development; Oligarchy; O11; O43; D31;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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