Credit Crunches and Inequality Dynamics

Advisor: Eduardo Zilberman

I develop an entrepreneurship model with occupational choices in an environment where agents face binding credit restrictions. I show that in economies where financial markets are tighter, the distribution of wealth is characterized by higher levels of inequality. The model is consistent with documented results in the literature concerning losses in TFP and other aggregate outcomes. I also analyze the transition dynamics of the wealth distribution in the aftermath of a once-and-for-all credit crunch shock and show that wealth accumulation might mitigate the misallocation implied by such adverse shocks.

M405