An Essay on Micro Heterogeneity and the Evolution of Inequality



Shin, Hyungsik

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The level of inequality has increased over the past several decades and reached at the historically high level in many developed countries. Yet, the traditional theory of supply and demand in labor has failed to elucidate the emergence of prevailing inequality from bottom up. In fact, its scope on inequality has been limited and overlooked the emergence of inequality through interactions of heterogeneous sub-systems in micro level. In this dissertation, therefore, I have used Agent-based Models as an alternative to traditional methods to understand the evolution of inequality given micro heterogeneity and bridge the gap between the theory and real world. In the first two chapters, I have studied how behaviors of ill-motivated heterogeneous individuals cause inequality to rise and severe crises. In the first chapter, it has focused to compare and contrast macro behaviors such as inequality and growth when the compen- sation system is vulnerable to free riding or not in an otherwise identical economy. The model results have demonstrated that if the compensation is ill-defined, individuals became selfish "free riders" and the economy became volatile hence experienced constantly rising inequality followed by crises. In the second chapter, it has examined the effect of such ill-defined compensation system on inequality and growth via consumption channels -- demand-driven recession. The simulation outcomes have revealed that even a mild income concentration in the hands of a few in the beginning could cause a terrible economic recession eventually because such an income squeeze led a decrease in consumption of the poor and middle class which in turns, drags down a whole economy. It has confirmed the wide-spreading belief that if the poor and middle class cannot afford to buy goods and services, it causes a collapse of an economy eventually. In the last chapter, I have explored that when information -- characteristics -- about goods is the object of preference rather than goods per se, contrast to the traditional theory of supply and demand, how such a change in the preference object affects market equilibrium and inequality in a barter-based economy. The simulation results have demonstrated that, depending on the ratio of characteristics of goods, even after finitely many numbers of trades, MRSs of goods do not necessarily converge to the optimal level. In other words, many agents are not content with their after-trade endowments but can't be helped because existing goods do not suit them to be Pareto optimal. When it comes to inequality, GINI coefficient, an index for measuring the level of inequality is limited to capture dynamics of the change in wealth over trades within a period. Thus, it is not clear that the change in the object of preference affects the evolution of inequality over trades as well as over time.



Demand-side driven crisis, Inequality, Kuznetsk Hypothesis, Lancaster preference, Rent-seeking behavior