Centre for Development Economics
Department of Economics

Delhi School of Economics


The Dynamics of Leverage and the Distribution of Wealth


Rajiv Sethi (Columbia University)
(Thursday, 16 March 2023, 3:15 PM IST)
Room No. 116 – New Seminar Room

The scale and terms of borrowing in an economy depend on the manner in which wealth is distributed across individuals with varying beliefs about the future. This distribution itself evolves over time as uncertainty is resolved, in favor of optimists if loans are repaid in full, and in favor of pessimists if there is widespread default. We model this process in an economy with two assets—risky bonds and risk-free cash. Within periods, given the inherited wealth distribution, there is a marginal lender who is the most pessimistic belief type to prefer bonds to cash. Following good states, the amount of borrowing and the face value of debt both rise, while a more optimistic belief type becomes marginal, and the interest rate falls. In the absence of noise in the distribution of wealth, there is path dependence even in the long run—wealth generally converges to beliefs that differ from the objective probability governing state realizations. In the presence of noise, the economy exhibits periods of high performance, punctuated by periods of crisis and stagnation.

All are cordially invited.

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