Credit Rationing, Wealth Inequality, and Allocation of Talent

We study an economy where agents are heterogeneous in terms of observablewealth and unobservable talent. Adverse selection forces creditors to ask forcollateral. We study the two-way interaction between rationing in the creditmarket and the wages offered in the labor market. Both pooling and separatingcredit contracts can be offered in equilibrium. The minimum wealth needed toobtain a separating contract is decreasing in the wage, whereas the minimumwealth needed for a pooling contract is increasing in the wage. If the first effectdominates, the derived labor demand can be upward sloping, resulting in thepossibility of multiple equilbria.[...]<br<