Market failures and the distribution of wealth: A perspective from the economics of information

Politics and Society

Volumn 24, Issue 4, 1996, Pages 411-432

  Hoff, Karla ^a  

^a NONE

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[No Author keywords available]

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EID: 0030300572     PISSN: 00323292     EISSN: None     Source Type: Journal    
DOI: 10.1177/0032329296024004009     Document Type: Review

References (71)

1. U.S. Congress, Joint Economic Committee, "The Mirage of Economic Equality" (May 1995).
2. Samuel Bowles and Herbert Gintis, "Efficient Redistribution: New Rules for Markets, States, and Communities," Politics and Society 24, no. 4 (1996): 313-14.
3. I discuss theoretical and empirical work below. Recent theoretical work includes Ben Bernanke and Mark Gertler, "Financial Fragility and Economic Performance," Quarterly Journal of Economics 105 (1990): 87-115; Karla Hoff and Andrew Lyon, "Non-Leaky Buckets: Optimal Redistributive Taxation and Agency Costs," Journal of Public Economics 58 (1995): 365-90; Patrick Legros and Andrew Newman, "Wealth Effects, Distribution, and the Theory of Organization," Journal of Economic Theory (forthcoming); and Philippe Aghion and Patrick Bolton, "A Theory of Trickle-Down Growth and Development," Review of Economic Studies (forthcoming). A precursor to this work is David Sappington, "Limited Liability Contracts between Principal and Agent," Journal of Economic Theory 29 (1983): 1-21, which demonstrates the importance of liability limitations in settings of imperfect information.
4. I discuss theoretical and empirical work below. Recent theoretical work includes Ben Bernanke and Mark Gertler, "Financial Fragility and Economic Performance," Quarterly Journal of Economics 105 (1990): 87-115; Karla Hoff and Andrew Lyon, "Non-Leaky Buckets: Optimal Redistributive Taxation and Agency Costs," Journal of Public Economics 58 (1995): 365-90; Patrick Legros and Andrew Newman, "Wealth Effects, Distribution, and the Theory of Organization," Journal of Economic Theory (forthcoming); and Philippe Aghion and Patrick Bolton, "A Theory of Trickle-Down Growth and Development," Review of Economic Studies (forthcoming). A precursor to this work is David Sappington, "Limited Liability Contracts between Principal and Agent," Journal of Economic Theory 29 (1983): 1-21, which demonstrates the importance of liability limitations in settings of imperfect information.
5. I discuss theoretical and empirical work below. Recent theoretical work includes Ben Bernanke and Mark Gertler, "Financial Fragility and Economic Performance," Quarterly Journal of Economics 105 (1990): 87-115; Karla Hoff and Andrew Lyon, "Non-Leaky Buckets: Optimal Redistributive Taxation and Agency Costs," Journal of Public Economics 58 (1995): 365-90; Patrick Legros and Andrew Newman, "Wealth Effects, Distribution, and the Theory of Organization," Journal of Economic Theory (forthcoming); and Philippe Aghion and Patrick Bolton, "A Theory of Trickle-Down Growth and Development," Review of Economic Studies (forthcoming). A precursor to this work is David Sappington, "Limited Liability Contracts between Principal and Agent," Journal of Economic Theory 29 (1983): 1-21, which demonstrates the importance of liability limitations in settings of imperfect information.
6. I discuss theoretical and empirical work below. Recent theoretical work includes Ben Bernanke and Mark Gertler, "Financial Fragility and Economic Performance," Quarterly Journal of Economics 105 (1990): 87-115; Karla Hoff and Andrew Lyon, "Non-Leaky Buckets: Optimal Redistributive Taxation and Agency Costs," Journal of Public Economics 58 (1995): 365-90; Patrick Legros and Andrew Newman, "Wealth Effects, Distribution, and the Theory of Organization," Journal of Economic Theory (forthcoming); and Philippe Aghion and Patrick Bolton, "A Theory of Trickle-Down Growth and Development," Review of Economic Studies (forthcoming). A precursor to this work is David Sappington, "Limited Liability Contracts between Principal and Agent," Journal of Economic Theory 29 (1983): 1-21, which demonstrates the importance of liability limitations in settings of imperfect information.
7. I discuss theoretical and empirical work below. Recent theoretical work includes Ben Bernanke and Mark Gertler, "Financial Fragility and Economic Performance," Quarterly Journal of Economics 105 (1990): 87-115; Karla Hoff and Andrew Lyon, "Non-Leaky Buckets: Optimal Redistributive Taxation and Agency Costs," Journal of Public Economics 58 (1995): 365-90; Patrick Legros and Andrew Newman, "Wealth Effects, Distribution, and the Theory of Organization," Journal of Economic Theory (forthcoming); and Philippe Aghion and Patrick Bolton, "A Theory of Trickle-Down Growth and Development," Review of Economic Studies (forthcoming). A precursor to this work is David Sappington, "Limited Liability Contracts between Principal and Agent," Journal of Economic Theory 29 (1983): 1-21, which demonstrates the importance of liability limitations in settings of imperfect information.
8. See Oded Galor and Joseph Zeira, "Income Distribution and Macroeconomics," Review of Economic Studies (1993): 35-52; Abhijit Banerjee and Andrew Newman, "Occupational Choice and the Process of Development, Journal of Political Economy 101 (1993): 274-98; Aghion and Bolton, "A Theory of Trickle-Down Growth and Development"; Vicky Barham, Robin Boadway, Maurice Marchand, and Pierre Pestieau, "Education and the Poverty Trap," European Economic Review 39:1257-75 ; and Ronald Bénabou, "Inequality and Growth," NBER Macroeconomics Annual (1996).
9. See Oded Galor and Joseph Zeira, "Income Distribution and Macroeconomics," Review of Economic Studies (1993): 35-52; Abhijit Banerjee and Andrew Newman, "Occupational Choice and the Process of Development, Journal of Political Economy 101 (1993): 274-98; Aghion and Bolton, "A Theory of Trickle-Down Growth and Development"; Vicky Barham, Robin Boadway, Maurice Marchand, and Pierre Pestieau, "Education and the Poverty Trap," European Economic Review 39:1257-75 ; and Ronald Bénabou, "Inequality and Growth," NBER Macroeconomics Annual (1996).
10. See Oded Galor and Joseph Zeira, "Income Distribution and Macroeconomics," Review of Economic Studies (1993): 35-52; Abhijit Banerjee and Andrew Newman, "Occupational Choice and the Process of Development, Journal of Political Economy 101 (1993): 274-98; Aghion and Bolton, "A Theory of Trickle-Down Growth and Development"; Vicky Barham, Robin Boadway, Maurice Marchand, and Pierre Pestieau, "Education and the Poverty Trap," European Economic Review 39:1257-75 ; and Ronald Bénabou, "Inequality and Growth," NBER Macroeconomics Annual (1996).
11. See Oded Galor and Joseph Zeira, "Income Distribution and Macroeconomics," Review of Economic Studies (1993): 35-52; Abhijit Banerjee and Andrew Newman, "Occupational Choice and the Process of Development, Journal of Political Economy 101 (1993): 274-98; Aghion and Bolton, "A Theory of Trickle-Down Growth and Development"; Vicky Barham, Robin Boadway, Maurice Marchand, and Pierre Pestieau, "Education and the Poverty Trap," European Economic Review 39:1257-75 ; and Ronald Bénabou, "Inequality and Growth," NBER Macroeconomics Annual (1996).
12. See Oded Galor and Joseph Zeira, "Income Distribution and Macroeconomics," Review of Economic Studies (1993): 35-52; Abhijit Banerjee and Andrew Newman, "Occupational Choice and the Process of Development, Journal of Political Economy 101 (1993): 274-98; Aghion and Bolton, "A Theory of Trickle-Down Growth and Development"; Vicky Barham, Robin Boadway, Maurice Marchand, and Pierre Pestieau, "Education and the Poverty Trap," European Economic Review 39:1257-75 ; and Ronald Bénabou, "Inequality and Growth," NBER Macroeconomics Annual (1996).
13. And so within this model, the statement cited above by the Joint Economic Committee of the U.S. Congress is valid.
14. Kaldor assumes that the marginal rate of savings for low-income persons is low, and on this basis builds his famous model, "Capital Accumulation and Economic Growth," in Further Essays in Economic Theory, ed. Nicholas Kaldor (New York: Holmes and Meier Publishers, 1978). His hypothesis regarding savings behavior has not been established in empirical studies: see Mark Gersovitz, "Saving and Development," in Handbook of Development Economics vol. 1, ed. Hollis Chenery and T. N. Srinivasan (Amsterdam: North-Holland, 1988), and Jeffrey Williamson, Inequality, Poverty, and History: The Kuznets Memorial Lectures, Lecture 3 (Cambridge, MA: Basil Blackwell, 1991).
15. Kaldor assumes that the marginal rate of savings for low-income persons is low, and on this basis builds his famous model, "Capital Accumulation and Economic Growth," in Further Essays in Economic Theory, ed. Nicholas Kaldor (New York: Holmes and Meier Publishers, 1978). His hypothesis regarding savings behavior has not been established in empirical studies: see Mark Gersovitz, "Saving and Development," in Handbook of Development Economics vol. 1, ed. Hollis Chenery and T. N. Srinivasan (Amsterdam: North-Holland, 1988), and Jeffrey Williamson, Inequality, Poverty, and History: The Kuznets Memorial Lectures, Lecture 3 (Cambridge, MA: Basil Blackwell, 1991).
16. Kaldor assumes that the marginal rate of savings for low-income persons is low, and on this basis builds his famous model, "Capital Accumulation and Economic Growth," in Further Essays in Economic Theory, ed. Nicholas Kaldor (New York: Holmes and Meier Publishers, 1978). His hypothesis regarding savings behavior has not been established in empirical studies: see Mark Gersovitz, "Saving and Development," in Handbook of Development Economics vol. 1, ed. Hollis Chenery and T. N. Srinivasan (Amsterdam: North-Holland, 1988), and Jeffrey Williamson, Inequality, Poverty, and History: The Kuznets Memorial Lectures, Lecture 3 (Cambridge, MA: Basil Blackwell, 1991).
17. Two overviews of the economics of information are Kenneth Arrow, "Limited Knowledge and Economic Analysis," American Economic Review (1974): 1-10, and Joseph Stiglitz, "Information and Economic Analysis: A Perspective," Economic Journal (1985): 21-41. They are interesting to read together as the first was written when the new paradigm was just emerging, and the second reviews the achievements of the period 1975-1985.
18. Two overviews of the economics of information are Kenneth Arrow, "Limited Knowledge and Economic Analysis," American Economic Review (1974): 1-10, and Joseph Stiglitz, "Information and Economic Analysis: A Perspective," Economic Journal (1985): 21-41. They are interesting to read together as the first was written when the new paradigm was just emerging, and the second reviews the achievements of the period 1975-1985.
19. The use of the terms principal and agent in economic theory is due to Stephen Ross, "The Economic Theory of Agency: The Principal's Problem," American Economic Review 63 (1973): 134-39. Helpful and accessible overviews are Kenneth Arrow, "Agency and the Market," in Handbook of Mathematical Economics, vol. 3, ed. Kenneth Arrow and Michael Intriligator (Amsterdam: North-Holland, 1986) 1183-95, and David Sappington, "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives (1991): 45-66.
20. The use of the terms principal and agent in economic theory is due to Stephen Ross, "The Economic Theory of Agency: The Principal's Problem," American Economic Review 63 (1973): 134-39. Helpful and accessible overviews are Kenneth Arrow, "Agency and the Market," in Handbook of Mathematical Economics, vol. 3, ed. Kenneth Arrow and Michael Intriligator (Amsterdam: North-Holland, 1986) 1183-95, and David Sappington, "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives (1991): 45-66.
21. The use of the terms principal and agent in economic theory is due to Stephen Ross, "The Economic Theory of Agency: The Principal's Problem," American Economic Review 63 (1973): 134-39. Helpful and accessible overviews are Kenneth Arrow, "Agency and the Market," in Handbook of Mathematical Economics, vol. 3, ed. Kenneth Arrow and Michael Intriligator (Amsterdam: North-Holland, 1986) 1183-95, and David Sappington, "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives (1991): 45-66.
22. Legros and Newman, "Wealth Effects, Distribution, and the Theory of Organization."
23. The model presented in this section is based on Bernanke and Gertler, "Financial Fragility," and Hoff and Lyon, "Non-Leaky Buckets." The same result - that low-wealth individuals lose access to credit - is derived from quite different information assumptions in Aghion and Bolton, "A Theory of Trickle-Down Growth and Development."
24. The model presented in this section is based on Bernanke and Gertler, "Financial Fragility," and Hoff and Lyon, "Non-Leaky Buckets." The same result - that low-wealth individuals lose access to credit - is derived from quite different information assumptions in Aghion and Bolton, "A Theory of Trickle-Down Growth and Development."
25. The model presented in this section is based on Bernanke and Gertler, "Financial Fragility," and Hoff and Lyon, "Non-Leaky Buckets." The same result - that low-wealth individuals lose access to credit - is derived from quite different information assumptions in Aghion and Bolton, "A Theory of Trickle-Down Growth and Development."
26. A proof is in Hoff and Lyon, "Non-Leaky Buckets," 373. For simplicity, Figure 2 assumes that pure time cost of funds is zero. This means that the opportunity cost of capital in end-of-period dollars (= 1) is the same as the initial fixed capital cost. Thus for W ≥ 1, individuals do not borrow. Since they then face no agency costs (L = 0), their expected gain from preparing a project is S - L = S, invariant with respect to their initial wealth.
27. A proof is in Bemanke and Gertler, "Financial Fragility". Part of the proof entails showing that the optimal financial contract is a debt contract. An interpretation of conditions under which debt is the optimal contract is in Karla Hoff and Andrew Lyon, "On the Self-limiting Entry of Lemons" (University of Maryland, 1996, mimeographed).
28. A proof is in Bemanke and Gertler, "Financial Fragility". Part of the proof entails showing that the optimal financial contract is a debt contract. An interpretation of conditions under which debt is the optimal contract is in Karla Hoff and Andrew Lyon, "On the Self-limiting Entry of Lemons" (University of Maryland, 1996, mimeographed).
29. A proof is in Hoff and Lyon, "Non-Leaky Buckets," 381-82. The proof uses the fact that transfers, by permitting individuals to increase their stake in the project, increase the average quality of borrowers and so lower equilibrium interest rates, while subsidies lower the average quality of borrowers and so increase equilibrium interest rates. As a result, individuals' willingness to trade off grants for subsidies is less than the trade-off between grants and subsidies that government can provide out of any given budget.
30. For a proof, see Hoff and Lyon, "Non-leaky Buckets," 374-79. In the case that transfers are financed by taxes on labor, what is required to obtain this result is that the efficiency gains from the collateralizable transfer exceed the efficiency costs of the tax. A sufficient, but not necessary, condition is that the labor market be initially undistorted. See ibid., 385.
31. For a proof, see Hoff and Lyon, "Non-leaky Buckets," 374-79. In the case that transfers are financed by taxes on labor, what is required to obtain this result is that the efficiency gains from the collateralizable transfer exceed the efficiency costs of the tax. A sufficient, but not necessary, condition is that the labor market be initially undistorted. See ibid., 385.
32. A survey of this work is outside the scope of this article. The reader is referred to Mark Gertler, "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit, and Banking 20 (1988): 559-88. See also Mark Gertler and Simon Gilchrist, "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," Quarterly Journal of Economics 109 (1994): 309-40. These studies, like the ones cited in the text below, are based on econometric analysis of data generated by the market. Interest in testing the extent of the barriers that low-wealth individuals face in participating in credit markets and in making productive investments has also motivated the undertaking of randomized experiments. Michael Kremer is undertaking an experiment in Vietnam where grants equal to a substantial fraction of average household annual income will be awarded to a random sample of households and their behavior compared to a control group's. If limited access to credit markets is important, then farm productivity, the establishment of small businesses, self-employment, and investment in education should be greater in the households that receive the grants than in the control group. See Michael Kremer, "Testing the Relationship Between Credit Constraints, Efficiency, and Redistribution Using Randomized Trials" (Massachusetts Institute of Technology, Cambridge, MA, 1996, mimeographed).
33. A survey of this work is outside the scope of this article. The reader is referred to Mark Gertler, "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit, and Banking 20 (1988): 559-88. See also Mark Gertler and Simon Gilchrist, "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," Quarterly Journal of Economics 109 (1994): 309-40. These studies, like the ones cited in the text below, are based on econometric analysis of data generated by the market. Interest in testing the extent of the barriers that low-wealth individuals face in participating in credit markets and in making productive investments has also motivated the undertaking of randomized experiments. Michael Kremer is undertaking an experiment in Vietnam where grants equal to a substantial fraction of average household annual income will be awarded to a random sample of households and their behavior compared to a control group's. If limited access to credit markets is important, then farm productivity, the establishment of small businesses, self-employment, and investment in education should be greater in the households that receive the grants than in the control group. See Michael Kremer, "Testing the Relationship Between Credit Constraints, Efficiency, and Redistribution Using Randomized Trials" (Massachusetts Institute of Technology, Cambridge, MA, 1996, mimeographed).
34. A survey of this work is outside the scope of this article. The reader is referred to Mark Gertler, "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit, and Banking 20 (1988): 559-88. See also Mark Gertler and Simon Gilchrist, "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," Quarterly Journal of Economics 109 (1994): 309-40. These studies, like the ones cited in the text below, are based on econometric analysis of data generated by the market. Interest in testing the extent of the barriers that low-wealth individuals face in participating in credit markets and in making productive investments has also motivated the undertaking of randomized experiments. Michael Kremer is undertaking an experiment in Vietnam where grants equal to a substantial fraction of average household annual income will be awarded to a random sample of households and their behavior compared to a control group's. If limited access to credit markets is important, then farm productivity, the establishment of small businesses, self-employment, and investment in education should be greater in the households that receive the grants than in the control group. See Michael Kremer, "Testing the Relationship Between Credit Constraints, Efficiency, and Redistribution Using Randomized Trials" (Massachusetts Institute of Technology, Cambridge, MA, 1996, mimeographed).
35. David Blanchflower and Andrew Oswald, "What Makes a Young Entrepreneur?" Journal of Labor Economics (forthcoming).
36. Jane Black, David de Meza, and David Jeffreys, "House Prices, the Supply of Collateral and the Enterprise Economy," Economic Journal 106 (1996) 60-75.
37. Cited in ibid., 73.
38. Lawrence Summers, "Some Skeptical Observations on Real Business Cycle Theory," Minneapolis Federal Reserve, Bank Quarterly Review (Fall 1986): 23-27.
39. Bruce Greenwald and Joseph Stiglitz, Financial Market Imperfections and Business Cycles," Quarterly Journal of Economics 108 (1993): 77-114.
40. Glenn Hubbard and Anil Kashyap, "Internal Net Worth and the Investment Process: An Application to U.S. Agriculture," Journal of Political Economy 100 (1989): 506-34.
41. b]π′ is in effect the price (in expected value terms) paid for an additional expenditure of effort; it determines the agent's incentives to expend effort. The assumption of risk neutrality is important here because it means that labor contracts have no welfare dimension other than that of the implicit price. Allowing for risk aversion means that such contracts may also serve as insurance devices.
42. For the same reason, the tenant's access to credit is limited.
43. Jean-Jacques Laffont and Mohamed Salah Matoussi, "Moral Hazard, Financial Constraints and Sharecropping in El Oulja," Review of Economic Studies 62 (1995): 381-99. See also Radwan Shaban, "Testing Between Competing Models of Sharecropping," Journal of Political Economy 95 (1987): 893-920. Related studies have been undertaken in the U.S. service industry by comparing the performance of owner-operated outlets and outlets run by hired managers. For instance, in a study of restaurants that experienced a shift from franchisee-ownership to company-ownership, or vice versa, J. P. Shelton found that the profit margin under franchisee ownership was 9.5 percent, compared to 1.8 percent under company management. See J. P. Shelton, "Allocative Efficiency vs. 'X-Efficiency': Comment," American Economic Review 57 (1967): 1252-58. A study of agency contracts in the fast food industry is Alan Krueger, "Ownership, Agency and Wages: An Examination of Franchising in the Fast Food Industry," Quarterly Journal of Economics 106 (1991): 75-101.
44. Jean-Jacques Laffont and Mohamed Salah Matoussi, "Moral Hazard, Financial Constraints and Sharecropping in El Oulja," Review of Economic Studies 62 (1995): 381-99. See also Radwan Shaban, "Testing Between Competing Models of Sharecropping," Journal of Political Economy 95 (1987): 893-920. Related studies have been undertaken in the U.S. service industry by comparing the performance of owner-operated outlets and outlets run by hired managers. For instance, in a study of restaurants that experienced a shift from franchisee-ownership to company-ownership, or vice versa, J. P. Shelton found that the profit margin under franchisee ownership was 9.5 percent, compared to 1.8 percent under company management. See J. P. Shelton, "Allocative Efficiency vs. 'X-Efficiency': Comment," American Economic Review 57 (1967): 1252-58. A study of agency contracts in the fast food industry is Alan Krueger, "Ownership, Agency and Wages: An Examination of Franchising in the Fast Food Industry," Quarterly Journal of Economics 106 (1991): 75-101.
45. Jean-Jacques Laffont and Mohamed Salah Matoussi, "Moral Hazard, Financial Constraints and Sharecropping in El Oulja," Review of Economic Studies 62 (1995): 381-99. See also Radwan Shaban, "Testing Between Competing Models of Sharecropping," Journal of Political Economy 95 (1987): 893-920. Related studies have been undertaken in the U.S. service industry by comparing the performance of owner-operated outlets and outlets run by hired managers. For instance, in a study of restaurants that experienced a shift from franchisee-ownership to company-ownership, or vice versa, J. P. Shelton found that the profit margin under franchisee ownership was 9.5 percent, compared to 1.8 percent under company management. See J. P. Shelton, "Allocative Efficiency vs. 'X-Efficiency': Comment," American Economic Review 57 (1967): 1252-58. A study of agency contracts in the fast food industry is Alan Krueger, "Ownership, Agency and Wages: An Examination of Franchising in the Fast Food Industry," Quarterly Journal of Economics 106 (1991): 75-101.
46. Jean-Jacques Laffont and Mohamed Salah Matoussi, "Moral Hazard, Financial Constraints and Sharecropping in El Oulja," Review of Economic Studies 62 (1995): 381-99. See also Radwan Shaban, "Testing Between Competing Models of Sharecropping," Journal of Political Economy 95 (1987): 893-920. Related studies have been undertaken in the U.S. service industry by comparing the performance of owner-operated outlets and outlets run by hired managers. For instance, in a study of restaurants that experienced a shift from franchisee-ownership to company-ownership, or vice versa, J. P. Shelton found that the profit margin under franchisee ownership was 9.5 percent, compared to 1.8 percent under company management. See J. P. Shelton, "Allocative Efficiency vs. 'X-Efficiency': Comment," American Economic Review 57 (1967): 1252-58. A study of agency contracts in the fast food industry is Alan Krueger, "Ownership, Agency and Wages: An Examination of Franchising in the Fast Food Industry," Quarterly Journal of Economics 106 (1991): 75-101.
47. An alternative explanation that Laffont and Matoussi consider, and reject, is that more able tenants have earned more in the past, have greater wealth, and so are more likely to be given rental contracts. When they eliminate this effect by restricting the analysis to young tenants, they obtain similar results.
48. The idea is expressed, for example, by Anne Robert Jacques Turgot, a minister under Louis XVI, cited in Hans Binswanger and Mark Rosenzweig, "Contractual Arrangements, Employment, and Wages in Rural Labor markets: A Critical Review," in Contractual Arrangements, Employment, and Wages in Rural Labor Markets in Asia, ed. Hans Binswanger and Mark Rosenzweig (New Haven, CN: Yale University Press, 1984), 49.
49. Abhijit Banerjee and Maitreesh Ghatak, "Empowerment and Efficiency: The Economics of Tenancy Reform" (Massachusetts Institute of Technology and Harvard University, Cambridge, MA, 1996, mimeographed), 2.
50. Ibid., Table 1.
51. The aggregate pattern that the authors seek to explain is as follows: Between 1968 and 1981 the annual average rate of growth of production of food grains in West Bengal was 0.43 percent, whereas that of India was 1.94 percent. However, between 1981 and 1992, the respective growth rates were 5.05 percent and 3.08 percent. Ibid., 2.
52. Ibid., 47. Efforts to refine this estimate, based on household data collected by the authors jointly with Paul Gertler, are in progress.
53. A formal statement of this result is Karla Hoff, "The Second Theorem of the Second Best," Journal of Public Economics 45 (1994): 223-42.
54. Bowles and Gintis, "Efficient Redistribution," 309.
55. Legros and Newman, "Wealth Effects, Distribution, and the Theory of Organization," cited in note 3.
56. For simplicity, the model abstracts from the possibility of a continuum of effort levels.
57. 22 = 1.2.
58. The equilibrium concept that Legros and Newman use in their proof is that of "the core," which is a stronger notion of equilibrium than that of a perfectly competitive market. In their model, an outcome is an equilibrium if no finite subset of individuals, by trading among themselves, can on their own improve their own lot. The usual definition of competitive equilibrium is one that no single individual can deviate from and thereby improve his own lot. Thus the core embodies a notion of unrestricted competition.
59. This is because of the particular assumptions about technology and information made in the example. From note 36, it does not pay to expand firm size beyond three individuals. And poor individuals do not themselves have the initial wealth needed to create a firm. A general statement of the results of the model, which does not depend on this particular example, is Result 5 below.
60. If agents are risk averse, a further obstacle to the transfer of ownership is that workers would not wish to concentrate their wealth in a single asset, as Bowles and Gintis emphasize in "Efficient Redistribution" (307-42).
61. Including John Roemer, A General Theory of Exploitation and Class (Cambridge, MA: Harvard University Press, 1982); Pranab Bardhan, "Determinants of Supply and Demand for Labor in a Poor Agrarian Economy: An Analysis of Household Survey Data for Rural West Bengal," in Contractual Arrangements, Employment, and Wages in Rural Labor Markets in Asia, ed. Hans Binswanger and Mark Rosenzweig, New Haven, CT: Yale University Press, 242-62; Samuel Bowles, "The Production Process in a Competitive Economy: Walrasian, Neo-Hobbesian, and Marxian Models," American Economic Review 75 (1985): 16-36; Samuel Bowles and Herbert Gintis, "Contested Exchange: Political Economy and Modern Economic Theory," American Economic Review 78 (1988): 145-50; Mukesh Eswaran and Ashok Kotwal, "Why Are Capitalists the Bosses," Economic Journal 99 (1989): 162-76; and Dilip Mookherjee, "Informational Rents and Property Rights in Land," in Property Rights, Incentives and Welfare, ed. John Roemer (MacMillan Press, forthcoming).
62. Including John Roemer, A General Theory of Exploitation and Class (Cambridge, MA: Harvard University Press, 1982); Pranab Bardhan, "Determinants of Supply and Demand for Labor in a Poor Agrarian Economy: An Analysis of Household Survey Data for Rural West Bengal," in Contractual Arrangements, Employment, and Wages in Rural Labor Markets in Asia, ed. Hans Binswanger and Mark Rosenzweig, New Haven, CT: Yale University Press, 242-62; Samuel Bowles, "The Production Process in a Competitive Economy: Walrasian, Neo-Hobbesian, and Marxian Models," American Economic Review 75 (1985): 16-36; Samuel Bowles and Herbert Gintis, "Contested Exchange: Political Economy and Modern Economic Theory," American Economic Review 78 (1988): 145-50; Mukesh Eswaran and Ashok Kotwal, "Why Are Capitalists the Bosses," Economic Journal 99 (1989): 162-76; and Dilip Mookherjee, "Informational Rents and Property Rights in Land," in Property Rights, Incentives and Welfare, ed. John Roemer (MacMillan Press, forthcoming).
63. Including John Roemer, A General Theory of Exploitation and Class (Cambridge, MA: Harvard University Press, 1982); Pranab Bardhan, "Determinants of Supply and Demand for Labor in a Poor Agrarian Economy: An Analysis of Household Survey Data for Rural West Bengal," in Contractual Arrangements, Employment, and Wages in Rural Labor Markets in Asia, ed. Hans Binswanger and Mark Rosenzweig, New Haven, CT: Yale University Press, 242-62; Samuel Bowles, "The Production Process in a Competitive Economy: Walrasian, Neo-Hobbesian, and Marxian Models," American Economic Review 75 (1985): 16-36; Samuel Bowles and Herbert Gintis, "Contested Exchange: Political Economy and Modern Economic Theory," American Economic Review 78 (1988): 145-50; Mukesh Eswaran and Ashok Kotwal, "Why Are Capitalists the Bosses," Economic Journal 99 (1989): 162-76; and Dilip Mookherjee, "Informational Rents and Property Rights in Land," in Property Rights, Incentives and Welfare, ed. John Roemer (MacMillan Press, forthcoming).
64. Including John Roemer, A General Theory of Exploitation and Class (Cambridge, MA: Harvard University Press, 1982); Pranab Bardhan, "Determinants of Supply and Demand for Labor in a Poor Agrarian Economy: An Analysis of Household Survey Data for Rural West Bengal," in Contractual Arrangements, Employment, and Wages in Rural Labor Markets in Asia, ed. Hans Binswanger and Mark Rosenzweig, New Haven, CT: Yale University Press, 242-62; Samuel Bowles, "The Production Process in a Competitive Economy: Walrasian, Neo-Hobbesian, and Marxian Models," American Economic Review 75 (1985): 16-36; Samuel Bowles and Herbert Gintis, "Contested Exchange: Political Economy and Modern Economic Theory," American Economic Review 78 (1988): 145-50; Mukesh Eswaran and Ashok Kotwal, "Why Are Capitalists the Bosses," Economic Journal 99 (1989): 162-76; and Dilip Mookherjee, "Informational Rents and Property Rights in Land," in Property Rights, Incentives and Welfare, ed. John Roemer (MacMillan Press, forthcoming).
65. Including John Roemer, A General Theory of Exploitation and Class (Cambridge, MA: Harvard University Press, 1982); Pranab Bardhan, "Determinants of Supply and Demand for Labor in a Poor Agrarian Economy: An Analysis of Household Survey Data for Rural West Bengal," in Contractual Arrangements, Employment, and Wages in Rural Labor Markets in Asia, ed. Hans Binswanger and Mark Rosenzweig, New Haven, CT: Yale University Press, 242-62; Samuel Bowles, "The Production Process in a Competitive Economy: Walrasian, Neo-Hobbesian, and Marxian Models," American Economic Review 75 (1985): 16-36; Samuel Bowles and Herbert Gintis, "Contested Exchange: Political Economy and Modern Economic Theory," American Economic Review 78 (1988): 145-50; Mukesh Eswaran and Ashok Kotwal, "Why Are Capitalists the Bosses," Economic Journal 99 (1989): 162-76; and Dilip Mookherjee, "Informational Rents and Property Rights in Land," in Property Rights, Incentives and Welfare, ed. John Roemer (MacMillan Press, forthcoming).
66. Including John Roemer, A General Theory of Exploitation and Class (Cambridge, MA: Harvard University Press, 1982); Pranab Bardhan, "Determinants of Supply and Demand for Labor in a Poor Agrarian Economy: An Analysis of Household Survey Data for Rural West Bengal," in Contractual Arrangements, Employment, and Wages in Rural Labor Markets in Asia, ed. Hans Binswanger and Mark Rosenzweig, New Haven, CT: Yale University Press, 242-62; Samuel Bowles, "The Production Process in a Competitive Economy: Walrasian, Neo-Hobbesian, and Marxian Models," American Economic Review 75 (1985): 16-36; Samuel Bowles and Herbert Gintis, "Contested Exchange: Political Economy and Modern Economic Theory," American Economic Review 78 (1988): 145-50; Mukesh Eswaran and Ashok Kotwal, "Why Are Capitalists the Bosses," Economic Journal 99 (1989): 162-76; and Dilip Mookherjee, "Informational Rents and Property Rights in Land," in Property Rights, Incentives and Welfare, ed. John Roemer (MacMillan Press, forthcoming).
67. Enrique Iglesias, "Income Distribution and Sustainable Growth: A Latin American Perspective," in Income Distribution and High-Quality Growth, ed. Vito Tanzi and Keyoung Chu (Cambridge, UK: Cambridge University Press, forthcoming).
68. The example of section 1 assumes that projects have fixed capital costs, a special case of increasing returns. The example of section 3 assumes, in addition, increasing returns to scale with respect to labor inputs over some initial range.
69. Karla Hoff and Joseph E. Stiglitz, "Moneylenders and Bankers: Price-Increasing Subsidies with Monopolistic Competition," Journal of Development Economics (forthcoming).
70. Joseph Stiglitz, Whither Socialism? (Cambridge, MA: MIT Press, 1994), 174.
71. Legros and Newman, "Wealth Effects."