Imperfect credit markets, household wealth distribution, and development

This article discusses some key results in the theoretical literature on credit market imperfections, household wealth distribution, and development by conducting three types of analysis, which progressively build on one another. The first, a single dynasty model, explains how a household may be caught in a poverty trap because of credit market imperfections but says little about the effects of distribution on development. The second, a model of interacting dynasties with a fixed threshold, explains a collective poverty trap, with path dependence in the wealth distribution dynamics, but says little about the effects of inequality on development, owing to its absolute notion of the rich and the poor. The third, models of interacting dynasties with variable thresholds, offers a richer framework for understanding the dynamics of inequality and development under credit market imperfections, owing to its relative notion of the rich and poor.