A THEORY OF TRICKLE-DOWN GROWTH AND DEVELOPMENT

This paper develops a model of growth and income inequalities in the p resence of imperfect capital markets, and it analyses the trickle-down effect of capital accumulation. Moral hazard with limited wealth cons traints on the part of the borrowers is the source of both capital mar ket imperfections and the emergence of persistent income inequalities. Three main conclusions are obtained from this model. First, when the rate of capital accumulation is sufficiently high, the economy converg es to a unique invariant wealth distribution. Second, even though the trickle-down mechanism can lead to a unique steady-state distribution under laissez-faire, there is room for government intervention: in par ticular, redistribution of wealth from rich lenders to poor and middle -class borrowers improves the production efficiency of the economy bot h because it brings about greater equality of opportunity and also bec ause it accelerates the trickle-down process. Third, the process of ca pital accumulation initially has the effect of widening inequalities b ut in later stages it reduces them: in other words, this model can gen erate a Kuznets curve.