Working Paper

Asset pooling, credit rationing, and growth

Abstract: I study the effect of improved financial intermediation on the process of capital accumulation by augmenting a standard model with a general contract space. With the extra contracts, intermediaries endogenously begin using ROSCAs, or Rotating Savings and Credit Associations. These contracts allow poor agents, previously credit rationed, access to credit. As a result, agents work harder and total economy-wide output increases; however, these gains come at the cost of increased inequality. I provide sufficient conditions for the allocations to be Pareto optimal, and for there to be a unique invariant distribution of wealth. I provide an analytic characterization of a simple model and use numerical techniques to study more general models.

Keywords: Financial markets; Credit;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 1998

Number: 1998-52