Equity issues in a dynamic economy with heterogeneous agents and imperfect markets

Abstract

Since the last decade an increasing body of theoretical literature has explored the endogenous determination of inequality and its role in affecting aggregate developments.  The papers presented in this thesis try to make a contribution about the policy issue of improving equity conditions when imperfections in credit market limit the chance of social mobility of the poor.  Following a brief introduction, the first chapter investigates if equity progress can be achieved by a direct action on the prime origin of inequality, as incomplete credit markets are commonly understood.  Within a standard framework of banking and customer relationship, the chapter puts forward a novel factor affecting the equilibrium cost of credit, namely the incentive of the lender to undertake a costly screening technology in order to improve his private information about his own customers’ types.  An interesting finding of the chapter is a positive relationship between the ex post market power of the informed lenders and the size of his ex ante investment in the screening technology.  A pro-competitive regulation of imperfect credit market may prove counterproductive for lowering costs of loans, since it risks discouraging investment in the costly acquisition of information on the part of the lenders, then making even more severe the adverse selection problem constraining their supply of funds.  As its main policy implication, the paper finds a limited scope for public action on capital markets to countervail the barriers to a large access to credit coming from imperfect information.  The second chapter deals with the usual tool for equity, by theoretically exploring conditions for demand for redistribution to be politically sustainable in the long run.  Differently from recent literature on political economy, the location of the median voter and/or his preferred policy is allowed to endogenously shift over time, possibly reflecting the stance of redistribution in previous period.  As a result, a large variety of political equilibria is proved to occur in steady state; they depend on the strength by which economic structure by itself would widen or restrict inequality over time and the extent to which it can be counteracted by feasible redistribution.  Among the main findings, the dynamic feedback between pure economic factors and political input driving social mobility may hinder the path to steady state equilibrium, endogenously determining fluctuations in both redistribution and inequality.  The third chapter empirically assesses the impact of social security on aggregate private savings, based on Italian experience in the last fifty years.  The variety of recent reforms in the Italian pension system proves to exert a significant effect on consumption spending, along with domestic demographic changes.

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