Imperfect Capital Markets and Persistence of Initial Wealth Inequalities

53 Pages Posted: 16 Jul 2008

See all articles by Thomas Piketty

Thomas Piketty

National Center for Scientific Research (CNRS) - Centre d'Etudes Prospectives d'Economie Mathematique Appliquees a la Planification (CEPREMAP); Centre for Economic Policy Research (CEPR)

Date Written: November 1992

Abstract

We consider an infinite-horizon inter-generational economy with identical agents differing only in their inherited wealth and with a constant-returns-to-scale technology using capital and labour (called "effort") and displaying a purely idiosyncratic risk. If effort is contractible, full insurance contracts make the production deterministic and initial wealth inequalities cannot persist (just as in a neoclassical growth model). But if effort is not contractible the ability to commit is an increasing function of initial wealth so that in equilibrium poorer agents face tougher credit rationing and take smaller projects (i.e. use less capital); although there is no poverty trap, the initial distribution may have long-run effects: there can be multiple long-run stationary distributions, and all are continuous and ergodic on the same interval, but have different equilibrium interest rates (and therefore different degrees of intergenerational mobility). This provides an explanation for wealth differentials within a country as well as between countries, and a basis for redistributive policies with long-run effects.

JEL Classification: D20, D80, H11, H70, L22, P11

Suggested Citation

Piketty, Thomas, Imperfect Capital Markets and Persistence of Initial Wealth Inequalities (November 1992). LSE STICERD Research Paper No. TE255, Available at SSRN: https://ssrn.com/abstract=1160950

Thomas Piketty (Contact Author)

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