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Credit rationing, wealth inequality and allocation of talent

Ghatak, Maitreesh and Morelli, Massimo and Sjostrom, Tomas (2002) Credit rationing, wealth inequality and allocation of talent. TE, 441. London School of Economics and Political Science, Suntory and Toyota International Centres for Economics and Related Disciplines, London, UK.

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Identification Number: 441

Abstract

We study an economy where agents are heterogeneous in terms of observable wealth and unobservable talent. Adverse selection forces creditors to ask for collateral. We study the two-way interaction between rationing in the credit market and the wages offered in the labour market. Both pooling and separating credit contracts can be offered in equilibrium. The minimum wealth needed to obtain a separating contract is decreasing in the wage, whereas the minimum wealth needed for a pooling contract is increasing in the wage. If the first effect dominates, the derived labour demand can be upward sloping, resulting in the possibility of multiple equilibria.

Item Type: Monograph (Working Paper)
Official URL: http://sticerd.lse.ac.uk/
Additional Information: © 2002 the authors
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HB Economic Theory
JEL classification: O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O12 - Microeconomic Analyses of Economic Development
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
Sets: Collections > Economists Online
Departments > Economics
Research centres and groups > Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)
Date Deposited: 24 Jun 2008 10:15
Last Modified: 01 Oct 2010 08:55
URI: http://eprints.lse.ac.uk/id/eprint/5922

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