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Unformatted text preview: Credit and Microfinance offered smaller loans relative to where monitoring was costless Poverty Traps without multiple market failures – marginal product of an individual in an occupation should not reflect any endowment effects and hence should not be explainable by parent’s wealth However, even in developed countries – observe that credit market constraints limit entry to entrepreneurial activities ⇒ endowments matter! – econometric evidence shows that wealthier individuals more likely to become entrepreneur, not because they have greater ability but because liquidity constraints bind less strongly Two reasons for this – (a) use inherited wealth to finance fixed costs of setting up own project (b) use inherited wealth/assets as collateral to gain access to credit markets to finance own project Poor in contrast – (a) may have not inherited sufficient wealth to enable them to incur fixed cost of taking on their own project (b) may have not inherited sufficient wealth/assets to serve as collateral to gain access to formal credit markets Explain three things: (i) persistence of inequality and poverty (ii) why interventions which affect the distribution of endowments can have large effects on welfare – possible to get rid of source of market failure (iii) why lower inequality may be associated with higher growth – policies which equalise opportunities across households may lead to improvements in both equity and efficiency In this course we are looking at a range of such opportunity enhancing policies (e.g., land reform, microfinance, education, off-farm diversification) Development Economics, LSE Summer School 2007 110 ...
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This note was uploaded on 12/29/2011 for the course ECO 307 taught by Professor Dublin during the Spring '10 term at SUNY Stony Brook.

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