Wealth inequality,democracy and economic freedom

Using a novel panel data set from the Credit Suisse on the top wealth shares for 46 sample countries spanning 2000–2014, this paper empirically investigates to what extent wealth inequality influences economic freedom and whether this relationship is affected by the level of democracy. Economic freedom is measured by the Fraser Institute's economic freedom summary index as well as its five major sub-indices, such as government size, property rights, access to sound money, freedom to trade, and regulations. Wealth inequality is measured by the top wealth shares. Trade union density is used as an instrument for wealth inequality. Empirical results suggest that the rising wealth inequality significantly hampers overall economic freedom, property rights protection, freedom to trade, soundness of money and regulatory environment. Furthermore, this negative effect of wealth inequality is reinforced at a lower level of democracy. These findings are robust to alternative measures of wealth inequality, economic freedom, treatment for endogeneity, and model specification.     

Wealth inequality and collective action

We study the effect of inequality in the distribution of endowments of private inputs (e.g., land, wealth) that are complementary in production with collective inputs (e.g., contribution to public goods such as irrigation and extraction from common-property resources) on efficiency in a class of collective action problems. We focus on characterizing the joint surplus maximizing level of inequality, making due distinction between contributors and non-contributors, in a framework that allows us to consider a wide variety of collective action problems ranging from pure public goods to impure public goods to commons. We show that while efficiency increases with greater equality within the groups of contributors and non-contributors, so long the externalities (positive or negative) are significant, there is an optimal degree of inequality between these groups.     

Wealth inequality and employment fluctuations

This paper is concerned with the business cycle dynamics in search and matching models of the labor market when agents are ex-post heterogeneous. We focus on heterogeneity caused by different labor market histories and the resulting wealth inequality they generate. We show that this inequality implies wage rigidity relative to a complete insurance economy. The fraction of wealth poor agents prevents real wages from falling too much in recessions, since small decreases in income imply large losses in utility. Analogously, wages rise less during expansions than in models with homogeneous workers as small increases are enough for poor workers to accept job offers. This mechanism reduces the volatility of wages but generates more volatile employment levels.     

Wealth inequality and dynamic stability

We explore the link between wealth inequality and stability in a two-sector neoclassical growth model with heterogeneous agents. We show that when the inverse of absolute risk aversion (or risk tolerance) is a strictly convex function, wealth inequality is a factor that favors instability. In the opposite case, inequality favors stability. Our characterization also shows that whenever absolute risk tolerance is linear, as when preferences exhibit hyperbolic absolute risk aversion (HARA), wealth heterogeneity is neutral.     

Wealth inequality, preference heterogeneity and macroeconomic volatility in two-sector economies

We explore the link between wealth inequality, preference heterogeneity and macroeconomic volatility in a two-sector neoclassical growth model. First we prove that, if agents have homogeneous preferences, when the absolute risk tolerance is a strictly convex (concave) function, sufficiently high (low) levels of wealth inequality may lead to endogenous fluctuations in the neighborhood of the steady state. Second, we consider the effects of preference heterogeneity when agents are homogeneous with respect to their wealth. We show that when the utility function belongs to the HARA class, sufficiently high levels of preference heterogeneity may lead to endogenous fluctuations in the neighborhood of the steady state if the elasticity of intertemporal substitution in consumption is greater than one.     

Wealth inequality and credit markets: evidence from three industrialized countries

Economic theory predicts that changes in the distribution of wealth in an economy affect real interest rates if capital markets are imperfect. We investigate this link for the US, the UK, and Sweden, using multivariate time series analysis that explicitly allows for feedback effects between wealth inequality and real interest rates. Our estimates yield that, over the course of the twentieth century, decreases in wealth inequality led to significant declines in real interest rates. Our results therefore point to the importance of capital market imperfections that arise from moral hazard. They put to question the empirical relevance of a negative interest rate effect of inequality that may arise in variants of these models with high inequality, heterogeneous agents or adverse selection.     

Health, Wealth, and Fairness

How much health should we have and how should it be distributed? This paper studies how to define social objectives for the allocation of health and income in a setting where individuals may differ in their preferences about health and consumption, earning ability, and health disposition. It is shown, on the basis of three simple ethical principles, that a reasonable social objective is to apply the maximin criterion to “full‐health equivalent” incomes. An application to the choice of the optimal health policy illustrates how this social objective may be used.     

Merger policy,entry, and entrepreneurship

We assess the impact of merger policy on entry and entrepreneurship. When faced with uncertainty about its prospects, and foreseeing that it may wish to leave the market should profitability prove poor, a rational entrant considers possible exit routes. Horizontal merger reduces competition post-merger which, all else being equal, lowers welfare; but merger also provides a valuable exit route. By facilitating exit and thus raising the value of entry, more lenient merger policy may stimulate entry sufficiently that welfare is increased overall. We calculate the optimal merger policy in the form of a low, but positive, profitability threshold below which merger is permitted despite the adverse impact on post-merger competition. This may be viewed as an extension of the “failing firm defence” to include ailing, low profitability firms as well as imminently failing ones. Merger policy is compared with an entry subsidy, and the implications of strategic firm behaviour for the choice of merger policy are also examined.     

Regulation,entrepreneurship, and firm size

Journal of Regulatory Economics - We empirically investigate the theory that regulatory growth within an industry disproportionately burdens small businesses relative to their larger competitors....     

Property rights,entrepreneurship and coordination

The notion of plan coordination enjoys a central place in the analysis of institutions and competitive market processes. The conventional wisdom is that institutions and policies vary in the extent to which they promote competition and how quickly and completely they bring individuals’ plans into closer coordination with one another. Kirzner has provided the most fully elaborated statement on the use of coordination as a positive analytical device for explaining market dynamics and as a normative criterion for evaluating economic policies. We identify the core propositions in his analysis that elucidate how economic coordination depends upon that most fundamental of market institutions – the system of private property rights. We also probe into Kirzner's claims about inherent limitations in our ability to compare the coordinative potential of alternative property rights systems. We unpack the consequences of these core propositions using the economic theory of property rights. We also examine Kirzner's assertion that dynamic competition – including Schumpeterian innovation – is necessarily coordinative in its market effects. We find that his argument rests on the implicit assumption that property rights remain constant during the process of market adjustment. We provide a case study of the advent of commercial aviation as a potential counterexample to his claims.     

Regulations,institutional quality and entrepreneurship

Journal of Regulatory Economics - This paper examines the impact of startup regulations and institutional quality on the level of new business activity in a panel of 119 countries between 2001 and...     

Wealth Effects, Incentives, and Productivity

Comparative static effects of varying the wealth level of a risk-averse agent in a moral hazard setting with limited liability constraints are investigated. There are two principal opposing effects of increasing wealth: the incentive effect, which allows stronger punishments for poor performance, thereby encouraging higher effort; and the preference effect, which reduces the agent's effort incentives owing to income effects in the demand for leisure. It is shown that optimal effort levels are initially constant, subsequently increasing and eventually decreasing in wealth. Hence agents with intermediate wealth levels are the most productive.     

Tax policy, venture capital, and entrepreneurship

The paper studies the effects of tax policy on venture capital activity. Entrepreneurs pursue a single high risk project each but have no own resources. Financiers provide funds, covering investment cost plus an upfront payment, in exchange for a share in the firm. The contract must include incentives to enlist full effort of entrepreneurs. Venture capitalists also assist with valuable business advice to enhance survival chances. The paper develops a general equilibrium framework with a traditional and an entrepreneurial sector and investigates the effects of taxes on the equilibrium level of managerial advice, entrepreneurship and welfare. It considers differential wage and capital income taxes, a comprehensive income tax, progressive taxation as well as investment and output subsidies to the entrepreneurial sector.     

Property rights,entrepreneurship, and economic development

The Review of Austrian Economics - The disparity in economic progress across nations still confound economists. However, economists know that institutions play a significant role in economic...     

Wealth, Enterprise and Credit Policy

Empirical evidence suggests that capital-market constraints prevent low-wealth individuals from setting up in business. This paper shows this finding to be consistent with socially excessive lending and an interest-rate tax being welfare-improving. One feature of the model, banks' inability to identify entrepreneurial quality, leads to excessive bank lending and investment in low-return projects. The reduction in the probability of bankruptcy lowers the cost of borrowing and eliminates deadweight costs and hence promotes entry. If the incentive effects are sufficiently large, wealth and the volume of entrepreneurial activity move together. A key result of the paper is to show that a market equilibrium in which there is a positive relationship between entry and the level of wealth is consistent with either subsidies to inactivity or taxes on interest raising welfare.     

Demography, growth, and inequality

We extend the single-sector endogenous growth model to allow for a general demographic structure. The model shows that due to the “generational turnover term,” the equilibrium growth rate is less than that of a representative agent model. We find the local dynamics about the balanced growth path (bgp) to be unstable, implying that the bgp is the only viable equilibrium. Using numerical simulations, we analyze how economic consequences of a change in the population growth rate differ, depending on the source of the demographic change. In addition, we analyze the relationship between changes in the demographic structure and what we call the “natural rate of wealth inequality”. Finally, we use our model to study how the demographic transition experienced by the United States has affected the economic growth rate and the degree of wealth inequality.     

Education, inequality and transition

I consider evidence on differences in access to education and in learning achievement within the countries of Central and Eastern Europe and the former Soviet Union. The situation inherited from the communist period is first summarized: there were some significant disparities with, for example, family background having a strong association with tertiary enrolments, as in Western countries. Analysis of the transition period focuses on differences in access and achievement associated with household income and geographic location. Disparities are not the same across the region; in some countries, such as Russia, there are clear grounds for serious concern, but it is unlikely that any country has cause for complacency.     

Economic growth,industrialization, and the environment

In this paper, I argue the compositional shift from agricultural to industrial production – industrialization – is a central determinant of changes in environmental quality as economies develop. I develop a simple two-sector model of neoclassical growth and the environment in a small open economy to examine how industrialization affects the environment. The model is estimated using sulfur emissions data for 157 countries over the period 1970–2000. The results show the process of industrialization is a significant determinant of observed changes in emissions: a 1% increase in industry's share of total output is associated with an 11.8% increase in the level of emissions per capita.