October 21, 2004

Absent the credit markets, expenditures of individual consumers are constrained by their income flows, and as a result, consumption has to match income each period. The consumption pattern will be one of famine during the low-income years and feast during the high-income years. This is opposed to a more steady consumption over their lifetime that could be achieved in a world where borrowing and lending are allowed. Another implication of the absence of capital markets is that individuals will be forced to delay or slowdown their investment in human capital. That, in turn, reduces the future benefits of any investment. Thus we can safely say that without the capital markets, the stock of human capital and the well-being of the individuals would be lower than it otherwise would be. In contrast, in a perfect capital markets world, individuals face a single constraint, that the net present value of their income must not exceed the net present value of their expenditures over his or her lifetimes. Consumption will be smoothed out and as a result of the financing opportunities, more investments will be undertaken earlier in time.

You must have an active account to view these reports. You may register for a trial here

Download Complete Report in PDF Format

Download Complete Report in Word Format