A Theory of Trickle-Down Growth and Development
Coauthor(s): Philippe Aghion.
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This paper develops a model of growth and income inequalities in the presence of imperfect capital markets, and it analyses the tickle-down effect of capital accumulation. Moral hazard with limited wealth constraints on the part of the borrowers is the source of both capital market imperfections and the emergence of persistent income inequalities. Three main conclusions are obtained from this model.
First, when the rate of capital accumulation is sufficiently high, the economy converges to a unique invariant wealth distribution. Second, even though the trickle-down mechanism can lead to a unique steady-state distribution under laissez-faire, there s room for government intervention: in particular, redistribution of wealth from rich lenders to poor and middle-class borrowers improves the production efficiency of the economy both because it brings about greater equality of opportunity and also because it accelerates the trickle-down process. Third, the process of captial accumulation initially has the effect of widening inequalities but in later stages it reduces them, in other words, this model can generate a Kuznets curve.
Source: Review of Economic Studies
Bolton, Patrick, and Philippe Aghion. "A Theory of Trickle-Down Growth and Development." Review of Economic Studies 64, no. 2 (April 1997): 151-72.