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ENDOGENOUS BORROWING CONSTRAINTS AND WEALTH INEQUALITY

Published online by Cambridge University Press:  29 March 2016

Joydeep Bhattacharya ,
Xue Qiao  and
Min Wang
Joydeep Bhattacharya
Affiliation:
Iowa State University
Xue Qiao
Affiliation:
Tsinghua University
Min Wang*
Affiliation:
Peking University
*
Address correspondence to: Min Wang, China Center for Economic Research, National School of Development, Peking University, Beijing 100871, China; email: [email protected].
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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.

Keywords

Wealth InequalityEducationEndogenous Borrowing ConstraintsExclusion
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 6 , September 2016 , pp. 1413 - 1431
Copyright
Copyright © Cambridge University Press 2016 

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