The dynamic cost and persistence of asset inequality in an agrarian economy

A growing literature suggests that asset inequality can be economically costly in the presence of agency costs that constrain labor and capital markets. Unclear in this literature is whether asset markets and optimal individual accumulation of self-finance capacity suffice to eliminate costly inequality over time. This paper uses numerical dynamic programming methods to explore this question with a model of an initially inegalitarian agrarian economy. While an egalitarian asset distribution emerges over time, the process involves sufficiently great productivity losses along the way, that a redistributive policy could improve on the market's performance by both equity and efficiency criteria. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: D91; O12; D31.