Title

Endogenous Borrowing Constraints and Wealth Inequality

Campus Units

Economics

Document Type

Article

Publication Version

Submitted Manuscript

Publication Date

9-2016

Journal or Book Title

Macroeconomic Dynamics

Volume

20

Issue

6

First Page or Article ID Number

1413

Last Page

1431

DOI

10.1017/S1365100514000959

Abstract

This paper studies the evolution of wealth inequality in an economy with endogenous borrowing constraints. In the model economy, young agents need to borrow to finance human capital investments but cannot commit to repaying their loans. Creditors can punish defaulters by banishing them permanently from the credit market. At equilibrium, loan default is prevented by imposing a borrowing limit tied to the borrower's inheritance. The heterogeneity in inheritances translates into heterogeneity in borrowing limits: endogenously, some borrowers face a zero borrowing limit, and some are partly constrained, whereas others are unconstrained. Depending on the initial distribution of inheritances, it is possible that all lineages are attracted either to the zero-borrowing-limit steady state or to the unconstrained-borrowing steady state—long-run equality. It is also possible that some lineages end up in one steady state and the rest in the other—complete polarization.

JEL Classification

E62, E25, E44, O23, O41

Comments

This article is published as 2016 Endogenous borrowing constraints and wealth inequality (with Min Wang and Xue Qiao), Macroeconomic Dynamics20, 1413-1431, DOI: 10.1017/S1365100514000959. Posted with permission.

Copyright Owner

Cambridge University Press

Language

en

File Format

application/pdf

Published Version Working Paper

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