Wealth Inequality, Wealth Constraints and Economic Performance

It is well known that if costlessly enforceable contracts regulate all of the actions of economic actors that a ect the well being of others, competitive equilibria are Pareto e cient regardless of the distribution of wealth. However where actions such as risk taking and hard work are not subject to such contracts, the assignment of residual claimancy over income streams and control over assets will a ect the feasibility, cost, and e ectiveness of contractual provisions and other incentive devices that may be used to attenuate the problems arising from contractual incompleteness and unenforceability. In this situation, as we will presently see, some distributions of assets support e cient or near e cient competitive allocations, while others preclude e ciency enhancing contractual arrangements. The widespread use of tenancy contracts governing residential and agricultural property is an example of the latter. Thus where contracts are incomplete or unenforceable, as in