UW-Madison UW-Madison

Staff Paper No. 416 - Abstract

The Dynamic Cost and Persistence of Asset Inequality in an Agrarian Economy

Michael R. Carter [mrcarter@wisc.edu]
Frederic Zimmerman

Staff Paper No. 416, March 1998, 40p.


A growing literature suggests that inequality is economically costly. However, much of this literature depends on static analyses, begging the question of why a market system doesn't redress inequality over time if it is efficient to do so. We develop a dynamic model of asset accumulation and endogenous asset-price formation in an agrarian economy with multiple market imperfections. The model is parameterized to pre-revolutionary Nicaragua and solved numerically. The results suggest that although a free land market would eventually lead to an egalitarian land distribution, the process would take long enough, and involve sufficiently great factor-use inefficiencies along the way, that a redistributive policy would improve on the market's performance in both equity and efficiency criteria.
Last updated on Thu, Jun 2, 2005 11:04am