Inequality and Growth in a Model with Borrowing Constraints

A simple theoretical model of economic growth and distribution is developed to describe the impact of private credit and debt on growth and inequality. In this model, agents who are assumed to be envious are subject to borrowing constraints. Depending on the stringency of the borrowing constraints, the economy can find itself in one of two regimes: a two-class regime and an egalitarian regime. In the two-class regime, the population is eventually divided into two groups: savers and spenders, where the spenders are eventually caught in the debt trap while the savers own all the capital and debt of the spenders. In the egalitarian regime, capital stock and output are higher in the long run than in the two-class regime. Under certain conditions, tightening the borrowing constraints can shift the economy from the two-class to the egalitarian regime.