How inequality can lead to inefficient economic outcomes

In the second part of the series, the author says there is evidence that inequality has encouraged excessive risk-taking in the financial sector and might have been partly responsible for the 2007-08

Pranab Bardhan

The last few decades of advance in economic theory and empirical findings have raised questions about the general applicability of the very idea of equality-efficiency trade-off. In the rest of this essay, we shall enumerate and examine some of the relevant issues here. When there is information asymmetry between the two sides in a given economic transaction, the above-mentioned trade-off may not hold. For example, creditors do not have enough information about the viability of a project brought to them by a potential borrower. You may have a project that you know is very much ...