Lotteries, inequality, and market imperfection: Galor and Zeira go gambling
Lotteries, inequality, and market imperfection: Galor and Zeira go gambling
This paper analyzes a simple extension to the work of Galor and Zeira (Rev Econ Stud 60:35–52, 1993). Allowing for endowment lotteries alters the dynamics of the model fundamentally: the poverty trap found in the original work vanishes for a wide class of parameters. Moreover, it turns out that in the presence of lotteries the relationship between the severity of credit market imperfections and long run aggregate income may be non-monotonic. We identify cases such that reducing the scope for moral hazard on the capital market decreases aggregate utility and may create a poverty trap and persistent income inequality in the economy.
poverty trap, credit market imperfections, investment indivisibility, lotteries
359-382
Gall, Thomas
8df67f3d-fe3c-4a3f-8ce7-e2090557fcd4
February 2008
Gall, Thomas
8df67f3d-fe3c-4a3f-8ce7-e2090557fcd4
Gall, Thomas
(2008)
Lotteries, inequality, and market imperfection: Galor and Zeira go gambling.
Economic Theory, 34 (2), .
(doi:10.1007/s00199-006-0171-x).
Abstract
This paper analyzes a simple extension to the work of Galor and Zeira (Rev Econ Stud 60:35–52, 1993). Allowing for endowment lotteries alters the dynamics of the model fundamentally: the poverty trap found in the original work vanishes for a wide class of parameters. Moreover, it turns out that in the presence of lotteries the relationship between the severity of credit market imperfections and long run aggregate income may be non-monotonic. We identify cases such that reducing the scope for moral hazard on the capital market decreases aggregate utility and may create a poverty trap and persistent income inequality in the economy.
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e-pub ahead of print date: 15 November 2006
Published date: February 2008
Keywords:
poverty trap, credit market imperfections, investment indivisibility, lotteries
Organisations:
Economics
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Local EPrints ID: 348651
URI: http://eprints.soton.ac.uk/id/eprint/348651
ISSN: 0938-2259
PURE UUID: 28723138-3326-45af-b080-1087018baaf5
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Date deposited: 18 Feb 2013 11:02
Last modified: 15 Mar 2024 03:46
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