Exploring the Effect of Wealth Distribution on Efficiency Using a Model of Land Tenancy with Limited Liability

When perfect information is present in a model, the initial distribution of wealth will have no effect on whether or not equilibrium is Pareto efficient. However, as Stiglitz (1987) emphasized, this no longer holds when imperfect information is introduced: the initial distribution of wealth can affect whether or not an economy is Pareto efficient. One reason, for this effect is that the distribution of wealth can effect whether or not moral hazard, and the inefficiencies associated with it, arise. In this paper, I demonstrate an example of this effect using first a model of land tenure with limited liability found in Ray and Singh (2001) and then a version of their model that is adapted by the addition of a second input into production. This adaption allows me to demonstrate, under certain conditions, that the distribution of wealth not only can affect whether or not the equilibrium allocation is first-best efficient but further whether it is even constrained efficient.