A Theory of Trickle-Down Growth and Development

TLDR

Moral hazard with limited wealth constraints on borrowers drives capital market imperfections and persistent income inequalities. The paper develops a model of growth and income inequalities under imperfect capital markets to analyze the trickle‑down effect of capital accumulation. The model incorporates imperfect capital markets and examines how capital accumulation influences income distribution. The model shows that high capital accumulation leads to a unique invariant wealth distribution, that redistribution from rich lenders to poorer borrowers improves production efficiency and accelerates trickle‑down, and that capital accumulation initially widens but later reduces inequalities, generating a Kuznets curve.

Abstract

This paper develops a model of growth and income inequalities in the presence of imperfect capital markets, and it analyses the trickle-down effect of capital accumulation. Moral hazard with limited wealth constraints on the part of the borrowers is the source of both capital market imperfections and the emergence of persistent income inequalities. Three main conclusions are obtained from this model. First, when the rate of capital accumulation is sufficiently high, the economy converges to a unique invariant wealth distribution. Second, even though the trickle-down mechanism can lead to a unique steady-state distribution under laissez-faire, there is room for government intervention: in particular, redistribution of wealth from rich lenders to poor and middle-class borrowers improves the production efficiency of the economy both because it brings about greater equality of opportunity and also because it accelerates the trickle-down process. Third, the process of capital accumulation initially has the effect of widening inequalities but in later stages it reduces them: in other words, this model can generate a Kuznets curve.