A Theory of Trickle-Down Growth and Development with Debt-Overhang

This paper considers a model of growth and income distribution in the presence of imperfect capital markets. Moral hazard on the part of borrowers is the source of both capital market imperfections and the emergence of persistent income inequalities. This model generates a Kuznets curve: in early phases of growth inequalities increase but in later stages they decrease. When the rate of capital accumulation is high enough the economy converges to a unique steady state with a unique invariant income distribution. 

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