Credit, inequality and trade

Credit market imperfection has wide-ranging influence on growth, human capital accumulation, financial crisis, public finance, occupational choice etc. Initial asset level of agents typically determine their credit limits as decided by the banks.

Typically more even distribution of assets lead to efficiency gains. This paper develops a general equilibrium framework to analyse the impact of asset distribution on production and exports of a credit-intensive sector and also the impact on income distribution of exports when credit market is imperfect.

Contrary to the conventional wisdom, this paper argues that more egalitarian asset distribution is likely to reduce output of the credit intensive sector when credit limit is determined by the level of asset ownership and firms face binding credit constraint for all levels of the asset.

Similarly, we argue that trade can lead to greater equality of income if we compare existing set of entrepreneurs and the fresh entrants. Benefits of international trade and/or redistributive policy depend critically on their impact on the entry of fresh entrepreneurs and whether credit constraint does not bind for some rich agents.