During the past 40 years, economic growth rates have varied tremendously across regions of the United States. I study the implications of this uneven local growth for wealth inequality using a model that embeds incomplete markets in an economic geography framework. The key mechanism of the model is that wages and house prices are tied to local conditions, so that local shocks induce correlated shocks to earnings and wealth. I calibrate the model to match important features of households’ portfolios and spatial data, and use it to obtain several insights regarding the distributional effects of observed regional growth patterns. First, city-level house return volatility is an important source of wealth inequality. Second, an unexpected shock that is estimated to match wage and house price growth rates across cities during the past four decades has substantial effects on the wealth distribution. Finally, land-use regulations play only a minor role in shaping these effects.
We present empirical evidence that weak household demand contributed to a reduction in firm entry in the Great Recession. Motivated by this evidence, we study the general equilibrium response of aggregate economic growth to a severe deleveraging event. To do so, we combine a standard incomplete markets model with a frontier class of endogenous growth models. A large reduction in credit access causes the zero lower bound to bind, inducing a drop in demand via employment rationing. Decreased demand in turn lowers the return to entrepreneurship and innovation, endogenously lowering productivity. We find that a persistent recession induced by deleveraging can significantly influence growth in productivity. Our main result is a powerful feedback effect: households increase savings in response to future slow growth, exacerbate the fall in demand, and further slow the recovery.
We provide an experimental and theoretical evaluation of a cost-reducing innovation in the delivery of “self-help group” microfinance services, in which privatized agents earn payments through membership fees for providing services. Under the status quo, agents are paid by an outside donor and offer members free services. In our multi-country randomized control trial we evaluate the change in this incentive scheme on agent behavior and performance, and on overall village-level outcomes. We find that privatized agents start groups, attract members, mobilize savings, and intermediate loans at similar levels after a year but at much lower costs to the NGO. At the village level, we find higher levels of borrowing, business-related savings, and investment in business. Examining mechanisms, we find that self-help groups serve more business-oriented clientele when facilitated by agents who face strong financial incentives.