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Abstract:

Theoretical Economics Paper
Credit Rationing, Wealth Inequality, and Allocation of Talent
Maitreesh Ghatak, Massimo Morelli and Tomas Sjostrom
October 2002
Paper No' TE/2002/441:
Full Paper (pdf)

Tags: occupational choice; adverse selection; wealth distribution; credit rationing.

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.