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Creditor Rights, Inequality and Development in a Neoclassical Growth Model

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  • Benjamin Moll

    (University of Chicago)

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.

Suggested Citation

  • Benjamin Moll, 2009. "Creditor Rights, Inequality and Development in a Neoclassical Growth Model," 2009 Meeting Papers 1168, Society for Economic Dynamics.
    • Handle: RePEc:red:sed009:1168
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    References listed on IDEAS

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    Cited by:

    1. Jan Grobovsek, 2014. "Managerial Delegation and Aggregate Productivity," 2014 Meeting Papers 1394, Society for Economic Dynamics.
    2. Mertens, Thomas M. & Judd, Kenneth L., 2018. "Solving an incomplete markets model with a large cross-section of agents," Journal of Economic Dynamics and Control, Elsevier, vol. 91(C), pages 349-368.
    3. Dusha Elton, 2019. "Persistent Inequality, Corruption, and Factor Productivity," The B.E. Journal of Macroeconomics, De Gruyter, vol. 19(2), pages 1-23, June.
    4. Azariadis, Costas & Kaas, Leo, 2016. "Capital Misallocation And Aggregate Factor Productivity," Macroeconomic Dynamics, Cambridge University Press, vol. 20(2), pages 525-543, March.
    5. Abhijit V. Banerjee & Benjamin Moll, 2010. "Why Does Misallocation Persist?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 189-206, January.
    6. Elton Dusha, 2015. "Persistent Inequality, Corruption, and Factor Productivity," Documentos de Trabajo 319, Centro de Economía Aplicada, Universidad de Chile.
    7. Thomas Mertens, 2012. "Solving General Incomplete Market Models with Substantial Heterogeneity," 2012 Meeting Papers 1173, Society for Economic Dynamics.

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