Factor income taxation and growth under asymmetric information

This paper studies the growth effects of factor income taxation on capital and labor in an endogenous growth model with overlapping generations. Capital accumulation in our model takes place through credit-financed investments in a market with asymmetric information between lenders and borrowers. We show that, in the presence of asymmetric information, capital income taxation worsens the adverse selection problem in the credit market, which in turn introduces an additional adverse effect on growth. In so doing, our analysis provides a new argument in favor of a lower (higher) capital (labor) income taxation in funding public expenditures.     

An Examination of Borrower Orientation and Scale Effects in UK Credit Unions

At present there are 597 credit unions operating within the UK with their growth, be it defined in term of new credit union establishment, asset growth or membership growth, placing them as the fasting growing financial grouping in the UK over this last decade.
The fundamental motivation of a credit union is to provide financial services to its membership, in particular a depository for savings and an access to consumer credit. As a practical problem there are, however, a number of reasons why credit unions may achieve a less than perfect balance in the treatment of borrowers and savers. For example, maintaining low loan rates may reduce the credit union's ability to offer high dividend rates while the maintenance of high dividend rates may require higher loan rates. Consequently, the competing pull of these two objectives may result in the emergence of conflict between those credit union members who on the one hand are net savers and those that are net borrowers. If such conflict does emerge it is then likely to place in jeopardy other aspects of a credit union's function most notably their role as financial counsellors and promoters of thrift within low income communities.
The approach taken in this study is to derive an index of member group imbalance and then to employ this index to determine whether member group imbalance has an adverse impact upon the generation of total benefits by individual credit unions. The analysis demonstrates that there is a strong pro-borrower bias in the operation of UK credit unions with this pro-borrower bias driven by the regulatory environment within which they operate.     

MONETARY POLICY,FINANCIAL CONSTRAINTS,AND REDISTRIBUTION

This article examines how financial constraints affect redistribution via monetary policy. We explore a novel mechanism of monetary nonneutrality, which is based on debt limits imposed in nominal terms. Specifically, when debt is constrained by current income, monetary policy can alter the real terms of borrowing. Changes in inflation exert ambiguous effects, depending on the initial debt/wealth position and the willingness to borrow. We show analytically that borrowers can benefit from increased debt limits under lower inflation rates. This novel effect can dominate conventional debt deflation effects. We find that particularly less indebted borrowers as well as potential future borrowers gain and that aggregate welfare can be enhanced under a permanent reduction in inflation.     

Public capital, asymmetric information, and economic growth

Abstract.  We investigate the provision of public capital in an endogenous growth model with asymmetric information. In a credit market with costly screening, we show that the equilibrium contracts are characterized by the self‐selection of borrowers. Through identifying an additional adverse effect of taxation on growth, we show that the optimal tax rate in our model is smaller than the output elasticity of public capital. Therefore, our analysis justifies a more conservative tax policy in the presence of asymmetric information. Furthermore, our model suggests a number of implications that appear to be well supported by preliminary evidence in cross‐country data. JEL classification: D82, H21, O41     

Discount rates and credit markets: Theory and evidence from rural india

Three models of credit markets - (1) the permanent income model, (2) upward sloping credit supply to individual borrowers, and (3) constrained credit due to imperfect enforcement - are tested using credit market data and an experimental study of individuals' discount rates in south India. The permanent income model is rejected by both the discount rate and the credit market data. The discount rate data are consistent with either of the other two models, while the credit market data are consistent with a combination of these two models. Other explanations are found to be insufficient to explain the results of this study.     

Membership has its privileges: the effect of social capital and neighbourhood characteristics on the earnings of microfinance borrowers

In this paper we examine the determinants of self-employment success for microcredit borrowers. Theories of social capital and neighbourhood effects are integrated in an attempt to account for earnings differentials among a unique sample of microfinance borrowers. We posit that social capital – social relations that facilitate individual action – is essential for microentrepreneurial success. Based on a survey and data collected by the authors, it is demonstrated that social capital is a positive determinant of self-employment earnings. The role that neighbourhoods play in fostering social capital and improving microentrepreneurial performance are also highlighted. JEL classification: J23, O17, Z13     

INCOME DISTRIBUTION, SOVEREIGN DEBT, AND PUBLIC INVESTMENT

We develop a political economy model of sovereign debt that shows that income inequality leads to popular pressures on the government to use foreign debt to finance a redistribution of income at the expense of productive public investment. Recognizing this fact, international lenders impose credit ceilings with the consequence that developing country borrowers invest less and grow slower.     

The effects of households’ and firms’ borrowing constraints on economic growth

This paper considers an endogenous growth model with asymmetric information between lenders and borrowers, that leads to credit-rationing a proportion of borrowers. However, in contrast to the existing literature, in this model, both firms and consumers face borrowing constraints. Nonetheless, the borrowing constraints facing a firm and those encountered by a consumer have opposing effects on growth. Relaxing borrowing constraints on firms is growth-promoting, as more funds become available for productive investment. In contrast, relaxing borrowing constraints facing consumers has a detrimental effect, as funds are diverted from productive investment to consumption. Such an adverse effect may offset the externality effect present in the production function that would otherwise ensure perpetual growth. Furthermore, it is shown that the interaction between households’ and firms’ borrowing constraints may give rise to endogenous cycles.     

Public debt dynamics with tax revenue constraints

We develop a dynamic model of public debt under the assumption that it is problematic for governments to implement fast increases of tax revenues, as new taxes require costly infrastructure and expertise that can be built only over time. In this environment, the standard condition requiring economic growth greater than interest costs is not sufficient to guarantee financial stability. Debt might become unstable if the gap between these two indicators falls below a given threshold. Our empirical analysis based on historical public finance data for the US provides strong support for the model. This study conveys a cautionary warning, because the debt of relatively safe borrowers may suddenly become unstable for instance because of a substantial deceleration in the growth of nominal income. These issues can be particularly relevant for those countries that do not have a modern and efficient tax collection system.     

Credit Unions and the Supply of Insurance to Low Income Households

Abstract ** :  Credit unions are typically viewed as financial intermediaries that differ from commercial banks only in terms of their institutional structure. This ignores their historical development as mutual self‐help societies. The distinctive feature of a credit union is taken in this paper to be the provision of insurance – membership gives access to credit in the event of a negative income shock. Banks do not provide such loans because of the low credit worthiness of such borrowers. The application of the model to those credit unions designated as low‐income in the US allows them to be broken up into distinct types .     

Endogenous capital market imperfections, human capital, and intergenerational mobility

In this paper, capital market imperfections are endogenized considering an adverse selection problem between banks and borrowers. We develop a growth model with linear OLG wealth dynamics, where agents are heterogeneous in terms of observable wealth and ability, which is private information. We show that banks react to this informational asymmetry by granting higher loans to talented borrowers. This, in turn, helps poor and talented agents to become educated and catch up with the rich agents. Furthermore, the credit market friction leads to greater human capital accumulation.     

Endogenous capital market imperfections,human capital,and intergenerational mobility

In this paper, capital market imperfections are endogenized considering an adverse selection problem between banks and borrowers. We develop a growth model with linear OLG wealth dynamics, where agents are heterogeneous in terms of observable wealth and ability, which is private information. We show that banks react to this informational asymmetry by granting higher loans to talented borrowers. This, in turn, helps poor and talented agents to become educated and catch up with the rich agents. Furthermore, the credit market friction leads to greater human capital accumulation.     

THE TWO‐WAY RELATIONSHIP BETWEEN GOVERNMENT SPENDING AND CORRUPTION AND ITS EFFECTS ON ECONOMIC GROWTH

The existing empirical evidence suggests that in low‐income economies, an increase in government spending leads to a reduction of growth. This article aims to explain this empirical fact by considering a growth model that incorporates a two‐way relationship between corruption and government spending. That is, government spending gives rise to corruption and rent seeking, which feeds back by distorting the structure and size of government spending. In addition, the cost of corruption depends on the wage rate. Therefore, in low‐income economies, increases in government spending tend to generate larger social losses caused by a higher level of rent dissipation and a concomitant rise in corruption and government inefficiency. Consequently, in such economies, an increase in government spending is more likely to result in a decline of economic growth. (JEL H3, O11, O41)     

Health Insurance, Liquidity and Growth

Within the context of an endogenous growth model, it is shown that in the presence of health risks which influence household income, the introduction of a private insurance company increases the long-term economic growth rate. The introduction of such an institution has two effects on savings: a level effect and a composition effect. Although the presence of this risk-reducing institution induces a decrease in the level of total savings, as suggested in earlier papers, the rate of illiquid savings, which contribute to growth, increases.
JEL Classification E 1; G 2; O 1; O 4     

The redistributive effects of inflation and of the introduction of a real tax system in the U.S. bond market

This paper investigates which types of borrowers and lenders in the U.S. bond market gain (or lose) as result of the interaction of inflation with a nominal and discriminating tax structure. It is shown that an increase in the rate of inflation favors tax exempt institutions, and probably other lenders too. Corporate borrowers probably gain while mortage borrowers probably lose. The paper also investigates the one shot redistributive effects of indexing the tax structure. It is shown that the reform hurts tax exempt institutional investors and, probably, other lenders too. It hurts corporate borrowers and probably favors state and local governments and mortgage borrowers.     

THE SOURCES OF GROWTH AT DIFFERENT STAGES OF DEVELOPMENT

Cross-country growth regressions have become an increasingly common tool in empirical development research. But these regressions typically do not attempt to distinguish among countries in different stages of development. Three empirical methods are used to test for such differences. Several of the factors known to affect economic growth are shown to operate differently for countries in different portions of the global income distribution. The results have implications for the role of financial markets, openness and factor accumulation in promoting growth. (JEL O150 , O160 , O400 )     

Rate of growth and sector specialisation coevolution in a Kaldorian export-led growth model

This paper describes and simulates the way in which the growth rate and specialisation coevolve in an export-led growth model of Kaldorian type. The feedback from growth to exports is based on the causal chain ‘growth-profits-technology-income elasticity of exports’. The strength of this feedback differs among sectors, which are heterogeneous. Given the feedback from growth to the income elasticity of exports, growth and specialisation coevolve: sector specialisation determines aggregate growth, while aggregate growth modifies sector specialisation. An economic system converges towards a medium-period macro equilibrium where the rate of growth and sector specialisation are constant. After a certain period endogenous structural changes emerge, the system changes its growth regime and shifts towards another equilibrium. The result is strongly path and time dependent.JEL classification: F43, O31, O41     

Exports,Imports and Income in Taiwan: An Examination of the Export Led Growth Hypothesis

Cointegration and vector autoregression are used to examine relationships among exports, imports, and income in Taiwan from 1971 to 1995. These three series are cointegrated. There is bidirectional Granger causality between exports and imports, and between imports and income. Impulse responses and variance decompositions uncover only weak links from exports to income. The export led growth hypothesis is not supported for Taiwan during this period of rapid growth. [F1, F4, O0]     

Cash-on-hand and demand for credit

Subprime consumers often use small-dollar credit products, such as payday loans, to meet short-term financial needs over pay cycles. However, relatively little is known about the income sensitivity of demand for credit in this market. This paper provides a causal estimate of the effect of tax rebates on the demand for small-dollar credit, using a unique proprietary loan-level dataset. Identification relies on variation in state Earned Income Tax Credit (EITC) generosity for areas within the same commuting zones that span state borders. The results show that a $100 increase in EITC benefits leads to an 8.3% reduction in the number of loan applications and a 6.6% reduction in the number of borrowers. This could translate into sizable reductions in loan volume and savings in financial charges. More broadly, the results suggest that public programs with income benefits could help recipients with consumption smoothing in the presence of credit market frictions.     

Growth and income inequality: a canonical model

Summary. We develop an endogenous growth model with elastic labor supply, in which agents differ in their initial endowments of physical capital. In this framework, the growth rate and the distribution of income are jointly determined. The key equilibrating variable is the equilibrium labor supply. It determines the rate of return to capital, which in turn affects both the rate of capital accumulation and the distribution of income across agents. We then examine the impact of various structural shocks on growth and distribution. We find that faster growth is associated with a more unequal, contemporaneous distribution of income, consistent with recent empirical findings.Received: 7 October 2004, Revised: 18 February 2005, JEL Classification Numbers: O17, O40.Cecilia García-Peñalosa: Correspondence toGarcía-Peñalosa would like to acknowledge the financial support received from the Institut d’Economie Publique (IDEP), Marseille. Turnovsky’s research was supported in part by the Castor endowment at the University of Washington. The paper has benefited from seminar presentations at the University of California, Riverside, and the University of Kansas, as well as from the comments of an anonymous referee.