Credit Rationing, Wealth Inequality, and Allocation of Talent

32 Pages Posted: 16 Jul 2008

See all articles by Maitreesh Ghatak

Maitreesh Ghatak

London School of Economics (LSE) - Department of Economics

Massimo Morelli

Bocconi University

Tomas Sjostrom

affiliation not provided to SSRN

Date Written: October 2002

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.

JEL Classification: D20, D80, H11, H70, L22, P11

Suggested Citation

Ghatak, Maitreesh and Morelli, Massimo and Sjostrom, Tomas, Credit Rationing, Wealth Inequality, and Allocation of Talent (October 2002). LSE STICERD Research Paper No. TE441, Available at SSRN: https://ssrn.com/abstract=1160986

Maitreesh Ghatak (Contact Author)

London School of Economics (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom
44 20 7852 3568 (Phone)
44 20 7955 6951 (Fax)

HOME PAGE: http://sticerd.lse.ac.uk/dps/adds/ghatak/cv-lse-sept02.pdf

Massimo Morelli

Bocconi University ( email )

Via Roentgen 1
Milan, 20136
Italy

Tomas Sjostrom

affiliation not provided to SSRN

No Address Available

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