published in: European Economic Review, 2007, 51 (8), 1941-1958
Smoother labor incomes alleviate credit constraints by reducing workers' desire to borrow,
and prospects of upward income mobility have smaller beneficial effects for currently poor
workers when borrowing constraints are binding. These simple theoretical insights are
consistent with the empirically more pronounced tendency of poor would-borrowers to favor
government redistribution in countries where consumer credit is relatively scarce. They may
also explain observed institutional patterns across countries and markets: policies that
reduce the dispersion and volatility of labor income appear to be more prevalent in countries
where inefficient legal systems restrict borrowing opportunities. Our theoretical perspective
and empirical results offer more general insights as to ways in which historically determined
features and politico-economic interactions may jointly shape institutional aspects of different
markets, and as to appropriate design of reform processes.
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