Profit Sharing, Income Inequality and Capital Accumulation

Nabi, Mahmoud Sami (2012): Profit Sharing, Income Inequality and Capital Accumulation.

Abstract

The relationship between economic development and income inequality is not neutral vis-à-vis the role of the financial system in responding to the needs of different categories of agents. Indeed, as shown by the literature of the persistent inequality (e.g. Banarjee and Newman, 1993; Piketty, 1997), taking in account the asymmetric impact of the financial imperfections on wealthy and poor agents changes the pace of the Kuznets (1955) relationship between economic development and income inequality. In this paper we try to analyze the effect of introducing profit-sharing financial contract between banks and entrepreneurs on the evolution of the capital accumulation/income inequality relationship. It is interestingly shown that income inequality disappears when the economy reaches a second stage of development.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial imperfection, profit sharing, inequality, capital accumulation
• Subjects: D - Microeconomics > D6 - Welfare Economics > D63 - Equity, Justice, Inequality, and Other Normative Criteria and Measurement; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance

References

Aghion, P. and P. Bolton (1997), "A Theory of Trickle-Down Growth and Development," Review of Economic Studies, 59, 151-72.

Ahmed, H. (2000), "Incentive-Compatible Profit-Sharing Contracts: a Theoretical Treatment," In Islamic Banking and Finance : New Perspectives on Profit-Sharing and Risk edited by Munawar Iqbal and David T. Llewellyn, Edward Elgar, Cheltenham, UK, Northampton, MA, USA.

Banerjee, A. V and A.F. Newman (1993), "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April.

Blanchflower,D. G andA. J. Oswald (1987), "Profit Sharing—Can ItWork?," Oxford Economic Papers, Oxford University Press, vol. 39(1), pages 1-19, March.

Chapra, M. U. (1985), Towards a Just Monetary System, Leicester, UK: The Islamic Foundation.

Clarke, G., L. C. Xu, and H-F Zou (2003), "Finance and income inequality: test of alternative theories," Policy Research Working Paper Series 2984, The World Bank.

Demirguc-Kunt, A. and R. Levine (2009), "Finance and inequality : theory and evidence," Policy Research Working Paper Series 4967, The World Bank.

Gale, D. and M. Hellwig (1985), "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.

Khan, S. (1987), “An Economic Analysis of a PLS Model for the Financial Sector”, in Theoretical Studies in Islamic Banking and Finance, edited by Mohsin S. Khan and Abbas Mirakhor, The Institute for Research and Islamic Studies, Houston.

Krasa, S., T. Sharma, and A.Villamil (2008), “Bankruptcy and firm finance,” Economic Theory, Springer, vol. 36(2), pages 239-266, August.

Kuznets, S. (1955). “Economic growth and income inequality.” American Economic Review, 49, 1—28.

Nabi, M. Sami (2009), "Financial Imperfections, Inequality and Capital Accumulation," Economics Buelletin, Vol. 29 No. 3, pp. 2400-2415. OECD (2008), Growing Unequal? Income Distribution and Poverty in OECD Countries, OECD Publishing.

Perotti, R. (1996), "Growth, income distribution, and democracy: what the data say". Journal of Economic Growth, 1, 149—87.

Persson, T. and G. Tabellini (1994), " Is inequality harmful for growth?" American Economic Review, 84,600—21.

Piketty, T. (1997), "The Dynamics of theWealth Distribution and the Interest Rate with Credit Rationing," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 173-89, April.

Stewart, Geoff (1989), "Profit-sharing in cournot oligopoly," Economics Letters, Elsevier, vol. 31(3), pages 221-224, December.

Townsend, R. M. (1979), "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.

Ul Haque, N. and A. Mirakhor (1986), "Optimal Profit-Sharing Contracts and Investment in an Interest-Free Islamic Economy," IMF Working Paper, Vol. , pp. 1-31.