The Dynamic Cost and Persistence of Asset Inequality in an Agrarian Economy

A growing literature suggests that inequality is economically costly. However, much of this literature depends on static analyses, begging the question of why a market system doesn't redress inequality over time if it is efficient to do so. We develop a dynamic model of asset accumulation and endogenous asset-price formation in an agrarian economy with multiple market imperfections. The model is parameterized to pre-revolutionary Nicaragua and solved numerically. The results suggest that although a free land market would eventually lead to an egalitarian land distribution, the process would take long enough, and involve sufficiently great factor-use inefficiencies along the way, that a redistributive policy would improve on the market's performance in both equity and efficiency criteria. keywords: Inequality and efficiency, Structural evolution, dynamic equilibrium analysis JEL codes: D91, O12, D31 ______________ * The authors respectively are Professor, Department of Agricultural and Applied Economics, University of Wisconsin-Madison and Assistant Professor, Food Research Institute, Stanford University. The authors gratefully acknowledge financial support from the MacArthur Foundation under a Research and Writing Grant in Peace and International Security.