Income Distribution, Financial Markets, and Growth

Guaitoli, Danilo

     The general topic of the dissertation is divided into two distinct yet related parts, one focusing more closely on the role of human capital and income distribution, the other on the role of financial markets, in the determination of equilibrium growth rates.
     The first part of the dissertation studies the dynamic relationship between distribution and endogenous growth in an overlapping generations model with accumulation of human and physical capital. It is shown how inequality affects per capita growth rates and levels and how the distribution evolves over time under different assumptions on private returns and the form of the externality in the technology for human capital. Conditions for existence, uniqueness and stability of a constant growth equilibrium with a stationary distribution are derived. Increasing returns, idiosyncratic abilities and the possibility of poverty traps are explicitely characterized in a closed form solution of the equilibrium dynamics, showing the role played by technology and preferences parameters. A Kuznets curve linking inequality and per capita income is also derived.
     The second part of the dissertation (joint work with Alberto Bisin) studies the relationship between financial markets and growth for economies characterized by asymmetries of information. The crucial assumption is that the set of contracts marketed in equilibrium is optimally determined by competing formal and/or informal financial intermediaries. Moreover, intermediaries cannot monitor the agents contractual relationships with competing intermediaries. In this set-up it is shown that competitive equilibria are Constrained Pareto Inefficient except in trivial cases. Both a moral hazard and a pure insurance example economy are studied in detail, and the growth properties of competitive equilibria are compared with those of Constrained Pareto Optima. The moral hazard example can help explain the puzzling performance of village economies (e.g. in semi-arid India) which are quite efficient in sharing risks, but have very small per-capita growth rates.