Economic Theory

, Volume 34, Issue 2, pp 359–382 | Cite as

Lotteries, inequality, and market imperfection: Galor and Zeira go gambling

Research Article

Abstract

This paper analyzes a simple extension to the work of Galor and Zeira (Rev Econ Stud 60:35–52, 1993). Allowing for endowment lotteries alters the dynamics of the model fundamentally: the poverty trap found in the original work vanishes for a wide class of parameters. Moreover, it turns out that in the presence of lotteries the relationship between the severity of credit market imperfections and long run aggregate income may be non-monotonic. We identify cases such that reducing the scope for moral hazard on the capital market decreases aggregate utility and may create a poverty trap and persistent income inequality in the economy.

Keywords

Poverty trap Credit market imperfections Investment indivisibility Lotteries 

JEL Classification Numbers

O16 D51 D31 

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Copyright information

© Springer-Verlag 2006

Authors and Affiliations

  1. 1.Economic Theory IIUniversity of BonnBonnGermany

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