Unemployment, credit rationing, and capital accumulation: a tale of two frictions |
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Authors: | Caroline Betts Joydeep Bhattacharya |
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Institution: | (1) Department of Economics, University of Southern California, Los Angeles, CA 90089, USA, US;(2) Department of Economics, State University of New York at Buffalo, Buffalo, NY 14260, USA (joydeepb@acsu.buffalo.edu), US |
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Abstract: | Summary. This paper develops a model in which two information frictions are embedded into an otherwise conventional neoclassical growth
model; an adverse selection problem in the labor market and a costly state verification problem in the credit market. The
former allows equilibrium unemployment to arise endogenously while the latter is responsible for equilibrium credit rationing.
This structure is used to investigate a theoretical link between the level of unemployment and the extent of credit rationing
(and capital formation). The presence of the labor market friction is enough to generate scope for multiple steady state equilibria.
The model also generates a large class of endogenous cyclical and chaotic dynamical equilibria. Development trap phenomena
may also appear.
Received: April 10, 1998; revised version: May 20, 1998 |
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Keywords: | and Phrases: Unemployment Credit rationing Cycles Chaos |
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