Unemployment, Credit Rationing, and Capital Accumulation: A Tale of Two Frictions

Posted: 9 Oct 1998

See all articles by Joydeep Bhattacharya

Joydeep Bhattacharya

Iowa State University - Department of Economics

Caroline Betts

University of Southern California - Department of Economics

Abstract

This paper develops a model in which two information frictions are embedded into an otherwise conventional neoclassical growth model: an adverse selection problem in the labor market and a costly state verification problem in the credit market. The former allows equilibrium unemployment to arise endogenously while the latter is responsible for equilibrium credit rationing. This structure is used to investigate a theoretical link between the level of unemployment and the extent of credit rationing (and capital formation). The presence of the labor market friction is enough to generate scope for multiple steady state equilibria. The model also generates a large class of endogenous cyclical and chaotic dynamical equilibria. Development trap phenomena may also appear.

JEL Classification: E13, E24, J6, J2

Suggested Citation

Bhattacharya, Joydeep and Betts, Caroline M., Unemployment, Credit Rationing, and Capital Accumulation: A Tale of Two Frictions. Available at SSRN: https://ssrn.com/abstract=107528

Joydeep Bhattacharya (Contact Author)

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States
515-294-5886 (Phone)
515-294-0221 (Fax)

Caroline M. Betts

University of Southern California - Department of Economics ( email )

KAP 300
Los Angeles, CA 90089
United States
213-740-2430 (Phone)

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