Credit Market Imperfections Research Articles

The effect of income inequality on human capital inequality: Evidence from China

This paper studies the effect of income inequality on human capital inequality empirically across 31 provinces, municipalities, and autonomous regions of China during 1996-2018. Using a series of econometric approaches, including the two-way fixed-effect IV panel regression, we find that: (i) growing income inequality is associated with an expansion in human capital inequality, given all other things being equal, and (ii) increasing the growth rate of initial income, as an essential family resource to finance access to schooling, tends to weaken the positive effect of income inequality on human capital inequality. Our results are consistent with the existing theory, showing that impoverished households who have less family resources are more likely to be restrained from accessing better education opportunities under credit market imperfections. Moreover, our results are robust to alternative modeling specifications and estimation methods, including instrumental variables that address the problem of reverse causality arising from human capital inequality.

Business cycles in emerging markets: The role of liability dollarization and valuation effects

Understanding differences in business cycle phenomena between Emerging Market Economies (EMEs) and industrialized countries has been at the center of recent research on macroeconomic fluctuations. We investigate whether these are linked to credit market imperfections. To this end, we develop a small open economy Dynamic Stochastic General Equilibrium (DSGE) framework featuring both permanent and transitory productivity shocks, endogenous exchange rate movements, and liability dollarization and valuation affects, thereby accounting for the fact that emerging markets are facing difficulties in borrowing in domestic currency on international capital markets. We estimate our model using Bayesian techniques for several EMEs, thereby controlling for potential heterogeneity across countries. Our main findings regarding EMEs’ business cycles are (i) despite financial frictions, trend shocks are the main determinant of macroeconomic fluctuations, (ii) accounting for liability dollarization ameliorates the model fit, and (iii) valuation effects on average stabilize changes in the net foreign asset position.

Growth and instability in a small open economy with debt

The relationship between public debt, growth and volatility is investigated in a Barro-type (1990) endogenous growth model, with three main features: we consider a small open economy, international borrowing is constrained and households have taste for domestic public debt. Therefore, capital, public debt and the international asset are not perfect substitutes and the economy is characterized by an investment multiplier. Whatever the level of the debt-output ratio, the existing BGP features expectation-driven fluctuations. If the debt-output ratio is low enough, there is also a second BGP with a lower growth rate. Hence, a lower debt does not stabilize the economy with credit market imperfections. However, a high enough taste for domestic public debt may rule out the BGP with lower growth. This means that if the share of public debt held by domestic households is high enough, global indeterminacy does not occur.

A novel technology adoption in an OLG framework: examining the cross-generational effects of promotional policies

We posit and analyse an inter-temporal decision-making problem associated with adopting a novel environmental-friendly (green) technology to replace a conventional one. Our analysis uses an overlapping generations model that incorporates credit market imperfections and adoptees’ bequest levels. In our model, technological returns are stochastic in nature and the adoptees are Bayesian learners. We solve for a stationary equilibrium for the mass of novel-technology adoptees and identify two effects that govern our results: (i) strategic substitutability effect and (ii) crowding out effect. Our results suggest that promotional measures to expedite the mass adoption of the novel technology need to be carefully implemented as they can have unforeseen inter-generational impacts arising from the interaction of the two effects. Our findings are especially relevant in the ongoing fight against climate change, particularly given the inter-generational nature of the costs and consequences involved in this fight to preserve the future of our planet.

Public Development Banks and Credit Market Imperfections

AbstractWhat should be the role of a public development bank (PDB)? Which projects/firms should the PDB target? What can theory say about the types of loans and ways of delivering them that PDBs around the world use? We analyze these questions in the context of a model where screening is costly to banks. Underprovision of credit results from the inability of banks to (i) appropriate the full benefits of projects they finance, more pronounced for high value projects; and (ii) internalize the benefits of screening in terms of aggregate lending. PDB intervention naturally addresses inefficiencies originating in failures in the private provision of credit. Though lending to commercial banks at subsidized rates or providing credit guarantees are valid alternatives, guarantees are less effective than subsidies at equivalent cost. PDB lending is particularly important in recessions, when liquidity/capital shortages are likely, and risk profiles deteriorate potentially leading to further credit underprovision. Subsidized lending is further preferred to guarantees when banks are facing a liquidity shortage, while a credit guarantees program has additional benefits when banks are undercapitalized.

How inequality hurts growth: Revisiting the Galor–Zeira model using the Korean case

AbstractThis paper aims to show that the level of inequality increases via the human capital channel, with credit market imperfections generating negative effects on economic growth. We expand the model presented by Galor and Zeira (Galor and Zeira, Review of Economic Studies, 1993, 60, 35–52) to represent the fact that the economy benefits from endogenous technological progress and that the government provides financial aid to reduce the financial hurdles for human capital accumulation. We use Korean data from 1998 to 2008 to empirically confirm that education plays a significant role in the divergence of household wealth over time and that the government's financial aid the form of the new student loans programme positively influences equality and short‐run economic growth by promoting the number of skilled workers.

The New Ricardian Specific Factor Model

This paper explores the implications on trade and wage inequality of introducing financial capital or credit in the standard Ricardian model of production, where a given amount of start-up credit is used to employ sector specific skilled and unskilled workers following the Wage Fund approach of classical economists. Thus, we have the Specific Factor (SF) structure of Jones (1971) in a new Ricardian model (NRM) with credit and two types of labour. With an entirely different mechanism from the conventional Neo-Classical structure, distributional consequences of changes in endowments, commodity prices, and financial capital are established. Comparisons with Jones (1971) show that unlike SF model, credit expansion affects wages and nominal costs without affecting trade patterns, while rise in the relative price of the skill-intensive good causes skilled wage to hike less than proportionately, and may cause return to capital to inflate more than the wages. We extend the basic model to analyse immigration, unemployment and imperfect credit market.

Retracted] Application of Multiobjective Particle Swarm Optimization in Rural Credit System

In China’s rural credit system, the problem of credit constraints is prominent. Due to the imperfect credit market, a large number of rural residents have credit constraints. Rural credit constraint is a serious problem restricting China’s rural economic development. Aimed at solving the rural credit constraints, this paper makes an optimization analysis on the rural credit system and loan decision‐making. To more reasonably evaluate customers’ borrowing ability, the credit risk based on farmers’ data on the big data platform is evaluated in this paper. The stacked denoising autoencoder network is improved by adopting the deep learning framework to improve the accuracy of credit evaluation. For improving the loan decision‐making ability of rural credit system, a loan optimization strategy based on multiobjective particle swarm optimization algorithm is proposed. The simulation results show that the optimization ability, speed, and stability of the proposed algorithm have achieved good results in dealing with the loan portfolio decision‐making problem.

Crédito do BNDES, dependência de finança externa, e intensidade de P&D nos setores da indústria brasileira (1998-2014)

Resumo Este trabalho busca testar se o BNDES desempenha um papel compensando potenciais imperfeições no mercado de crédito no que diz respeito a investimentos em P&D. Para isso, propomos uma análise de regressão com interação inspirada em Maskus et al. (2012). Utilizamos dados de 22 setores das indústrias extrativa e de transformação no Brasil, tendo como fontes principais a PINTEC, o BNDES e a PIA, compreendendo 6 triênios a partir de 1998 até 2014. Nossos resultados oferecem algum suporte para a hipótese de um papel positivo do BNDES: o crédito do BNDES está mais positivamente correlacionado com a intensidade de P&D em setores da indústria e períodos em que é maior a dependência de capital (financeiro) externo.

The dual-financial-threshold effect in the “club convergence” of economic growth: a dynamic panel threshold model

This paper revisits the “club convergence” of economic growth by taking imperfect credit market into account in the Schumpeterian growth models with technology transfer. It derives nonlinear relationships between financial development and economic growth via the dynamic evolution of technology gap. Using a dynamic panel threshold model, we find a dual-financial-threshold effect in the “club convergence” of economic growth which is highly consistent with theoretical conclusions. When a nation’s level of financial development is below the lower threshold value, the nation will not converge to the frontier growth rate, while the steady-state economic growth rate will strictly increase with the increased level. The probability of the convergence will considerably increase when the level lies between the lower and higher threshold values. The positive impact of the level on the steady-state relative output will gradually diminish with an obvious diminishing marginal utility, when the level is above the higher threshold value.

Short Planning Horizons and the Save More Tomorrow Program

Designed by Thaler and Benartzi (2004), the Save More Tomorrow (SMarT) program enables employees to pre-authorize an automatic escalation of their savings contribution rate into employer-sponsored retirement saving plans, wherein the escalation of the contribution rate typically occurs with the receipt of pay raises. We offer theoretical support for the SMarT program in a model setting with well-functioning credit markets and shortsighted individuals who plan only a fixed number of years into the future. We find that the SMarT saving rate that maximizes lifetime utility is positive, suggesting that the SMarT program increases the welfare of shortsighted individuals. We compute consumption equivalent variations and find that shortsighted individuals with a five-year planing horizon (i) would be better off by an equivalent of 13 percent of lifetime consumption as a result of participating in the SMarT program if they do not have access to a social security program; (ii) would be better off by 9 percent of lifetime consumption as a result of participating in the SMarT program in place of participating in social security; and, (iii) would be better off by 3 percent of lifetime consumption as a result of participating in the SMarT program in tandem with participating in a social security program. The consumption equivalent variations are smaller, although generally still positive, for individuals with longer planning horizons, and the consumption equivalent variations are larger for individuals with shorter planning horizons. Our results contrast with an existing, documented finding in which the SMarT program does not affect the consumption allocations (and therefore does not improve the welfare) of individuals with hyperbolic discount functions, at least in the absence of sizable credit market imperfections.

The stabilization role of police spending in a neo‐Keynesian economy with credit market imperfections

AbstractMotivated by a seemingly persistent “twin‐high” phenomenon in Latin America, we present a novel theoretical framework that has linkages between three institutions (education, criminal justice, and credit) to study policy‐pertinent research questions with regards to whether police spending has the potential to serve as an unconventional policy tool for macroeconomic management. Based on a stylized parameterization, we find formal and illegal human capital to share common cyclical properties, which can be "decoupled" under a rule‐based regime to police spending. This nonetheless comes at a cost of a greater propagation of the credit friction‐induced financial accelerator effect.

Growth effect of income inequality in sub-Saharan Africa: exploring the transmission channels

Abstract Sub-Saharan Africa (SSA) ranks as the second most unequal region globally (in terms of income distribution), harboring 10 of the 19 most unequal countries in the world. This paper explores the channels through which income inequality exerts its effects on economic growth in SSA. The study spans the period 1995–2015, focusing on 31 SSA countries. Findings from the two-step system generalized method of moments suggest that income inequality exerts a significant positive effect on economic growth via the saving transmission channel, while it has a statistically significant negative effect on economic growth in the region through the channels of fertility, credit market imperfection, and fiscal policy.

Barter Credit: Warehouses as a Contracting Technology

A large Brazilian agribusiness lender introduces a new contracting technology: grain warehouses. Using runner-up warehouse locations as a control group, I find that lenders' access to these warehouses permits a new debt contract, i.e. a barter credit repayable in grain, increases borrowers' debt capacity and lowers borrowing costs. The effects are stronger when price insurance is important, for municipalities with weaker courts, and for financially-constrained borrowers. Overall, evidence suggests that creditors alter their organizational design to mitigate credit market imperfections.

Is There Surplus Labor in Rural India?

We show empirically using panel data at the plot and farm level and based on a model incorporating supervision costs, risk, credit-market imperfections and scale-economies associated with mechanization that small-scale farming is inefficient in India. Larger farms are more profitable per acre, more mechanized, less constrained in input use after bad shocks, and employ less per-acre labor than small farms. Based on our structural estimates of the effects of farm size on labor use and the distribution of Indian landholdings, we estimate that over 20% of the Indian agricultural labor force is surplus if minimum farm scale is 20 acres.

Business cycles in emerging markets: the role of liability dollarization and valuation effects

Understanding differences in business cycle phenomena between Emerging Market Economies (EMEs) and industrialized countries has been at the center of recent research on macroeconomic fluctuations. The purpose of this paper is to investigate the importance of certain credit market imperfections in different EMEs. To this end, we develop a small open economy Dynamic Stochastic General Equilibrium (DSGE) framework featuring both permanent and transitory productivity shocks, differentiated home and foreign goods, and endogenous exchange rate movements. Furthermore, our model incorporates liability dollarization as a particular form of financial frictions in EMEs. In this vein, we account for the fact that emerging markets traditionally have had difficulties in borrowing in domestic currency on international capital markets and thus allow for valuation effects in our analysis. We estimate our model using Bayesian techniques for a number of EMEs and thereby control for potential heterogeneity across countries. Contrary to previous studies in this strand of the literature, we include a (vector-)autoregressive measurement error component to capture off-model dynamics. Regarding business cycles in emerging markets, our main findings are that (i) even though we incorporate financial frictions in the framework, trend shocks are the main determinant of macroeconomic fluctuations, (ii) accounting for liability dollarization ameliorates the model fit, and (iii) valuation effects on average stabilize changes in the net foreign asset position.

Economic Recession, Informal Sector and Skilled–Unskilled Wage Disparity in a Developing Economy: A Trade-Theoretical Analysis

The paper analyses some selective aspects of economic crises, namely skilled-sector recession, reversed international migration of labour and decline in foreign capital inflow on the informal sector employment and wage rate in developing economies and seeks to explain the non-monotonic effect on the informal sector both across nations and within nation across sectors. In so doing, we develop three-sector General Equilibrium models under two different scenarios which may apply to a large class of emerging market economies. In the first model, we have a traded informal export sector, and the role of the non-traded informal sector in the presence of credit market imperfection is analysed in the second model. Skilled-sector recession produces a favourable (unfavourable) effect on the workers employed in the traded informal sector (non-traded informal sector) due to an induced complementary relationship between the high-skilled export sector and the informal sector. A fall in emigration level of skilled or unskilled worker and a decline in foreign capital inflow hurt the workers in the informal traded sector, while the workers in the non-traded informal sector gain. The results of the paper reflect contradictions of an emerging economy, which is essentially hybrid economics in which capitalist nucleus has a conditional-conditioning relationship with an archaic structure. JEL Codes: F13, J31

Credit Market Imperfection, Lack of Entrepreneurs and Capital Outflow from a Developing Economy

This paper explores the impact of credit market on the entrepreneurs and demand for credit in a credit constrained economy and the resultant impact on the capital flows. In standard trade models the capital flows across countries are explained as a result of the rate of return differentials due to presence/absence of capital among the countries whereby capital flows from the capital rich countries to capital poor countries. We show that the rate of return differentials could arise due to presence/absence of entrepreneurs, i.e., low price of capital in autarky may reflect lack of demand for credit due to scarcity of entrepreneurs and not capital abundance and eventually may lead to capital outflow from a capital scarce country. This is a different way of echoing the sentiment of the well-known “Lucas Paradox” which suggests that capital might flow from the poor to the rich countries. We also show the possibility of trade and capital flow being complements and not substitutes, as is usual in standard models.

Asset Level Heterogeneity, Competition and Export Incentives: The Role of Credit Rationing

Firm heterogeneity is mostly discussed in the literature from the viewpoint of productivity differential. In contrast this paper recognizes wealth heterogeneity as an important factor that results in firm heterogeneity. The issue of wealth heterogeneity and export incentive through credit market imperfection over the life cycle of a firm remains largely unaddressed in the literature. This paper studies the dynamics of wealth heterogeneity and export incentive of credit rationed firms through asset building. The theoretical and empirical results indicate that an increase in the initial level of competition implies greater export incentive. However, over the life cycle of a firm, the role of competition is impacted by the intensity of capital accumulation and the initial level of wealth. Greater local competition before the entry of firms in the export market hurts export incentive by limiting cash flows and asset build up. Thus low profits due to competition allows firms to look for export opportunities but lower cash flows hurt such incentives.

Are the Liquidity and Collateral Roles of Asset Bubbles Different?

Several recent papers introduce different mechanisms to explain why asset bubbles are observed in periods of larger growth. These papers share common assumptions, heterogeneity among traders and credit market imperfection, but differ in the role of the bubble, used to provide liquidities or as collateral in a borrowing constraint. In this paper, we introduce heterogeneous traders by considering an overlapping generations model with households living three periods. Young households cannot invest in capital, while adults have access to investment and face a borrowing constraint. Introducing bubbles in a quite general way, encompassing the different roles they have in the existing literature, we show that the bubble may enhance growth when the borrowing constraint is binding. More significantly, our results do not depend on the - liquidity or collateral role attributed to the bubble. We finally extend our analysis to a stochastic bubble, which may burst with a positive probability. Because credit and bubble are no more perfectly substitutable assets, the liquidity and collateral roles of the bubble are not equivalent. Growth is larger when bubbles play the liquidity role, because the burst of a bubble used for liquidity is less damaging to agents who invest in capital.