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Distinguishing limited commitment from moral hazard in models of growth with inequality

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Abstract
We use non-parametric, reduced form and structural techniques to distin-guish the micro-economic foundations of two models of growth with increasing inequality using new data from rural and semi-urban households in Thailand. We estimate a limited commitment model that is similar to Evans and Jovanovic (1989) and a moral hazard model that is an extension of Aghion and Bolton (1996). Both models emphasize the role of occupational choice and financial constraints. While the models share many implications, they are distinguished by their assumptions about the nature of financial market imperfections. We provide structural and reduced form evidence that the dominant source of credit market imperfections varies with wealth. For poorer households limited commit-ment is the dominant concern. However, as wealth increases moral hazard gains importance. These findings provide a rationale for important characteristics of the financial environment in Thailand.

Suggested Citation

  • Anna L. Paulson & Robert M. Townsend, 2003. "Distinguishing limited commitment from moral hazard in models of growth with inequality," Working Paper Series WP-03-06, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:wp-03-06
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    References listed on IDEAS

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    Cited by:

    1. Conning, Jonathan & Udry, Christopher, 2007. "Rural Financial Markets in Developing Countries," Handbook of Agricultural Economics, in: Robert Evenson & Prabhu Pingali (ed.), Handbook of Agricultural Economics, edition 1, volume 3, chapter 56, pages 2857-2908, Elsevier.

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    Financial markets; Wealth;

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