nach oben

Journal of Economic Interaction and Coordination

Erschienen in:

13.04.2021 | Regular Article

Financial development, income and income inequality

verfasst von: George Vachadze

Erschienen in: Journal of Economic Interaction and Coordination | Ausgabe 3/2021

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

The aim of this paper is twofold. Firstly, we present a model in which both income and income inequality are jointly determined in a counter-cyclical manner via self-fulfilling expectation. We argue that multiple equilibria can arise in the presence of inelastic labor demand, a minimum investment requirement, and imperfections in the credit market. In one equilibrium, the market wage and labor income are both low. Young agents who become entrepreneurs work harder and save more than young agents who become depositors. As a result, the equilibrium is characterized by low-income and high-income inequality. In another equilibrium, the market wage and labor income are both high. Young agents supply the same amount of labor and save the same. As a result, the equilibrium is characterized by high-income and low-income inequality. Secondly, we present different dynamic scenarios predicted by the model and analyze the role of self-fulfilling expectations. The paper ends by providing some policy recommendations on how the coordination of agents’ expectations about labor market conditions and how improvements in financial development may affect the long-run income and income inequality.

Vorheriger Artikel Can loss framing improve coordination in the minimum effort game?

Nächster Artikel The effect of social distancing on the reach of an epidemic in social networks

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Nur mit Berechtigung zugänglich

A self-fulfilling expectation occurs when the adoption of a certain expectation about current and future economic conditions affects agents’ behavior in such a way that the expectation becomes a reality.

Agents in the proposed model face equality of opportunities, and thus, income inequality is not a result of historically shaped inequalities of opportunities, transmitted across generations through education, social position, place of birth, etc. Banerjee and Newman (1993), Galor and Zeira (1993), Aghion and Bolton (1997), Piketty (1997), Piketty (2000), Matsuyama (2000), Mookherjee and Ray (2002, 2003), and others argue that imperfections in the credit market may generate entry barriers, offer fewer opportunities for the poor, and cause the access to credit and the borrowing rate to depend on wealth and social status. As a result, long-run living standards can become dependent on the initial inequality which can persist or even be magnified over time. We do not argue that inequality of opportunities transmitted across generations is an unimportant factor for generating income inequality; instead, we argue that the endogenous income inequality is possible even when agents face equalities of opportunities.

To reduce the complexity of the model and avoid unnecessary complications, we assume here that firms employ a Leontief production technology. In “Appendix,” we relax this assumption and allow firms to employ a constant elasticity of substitution (CES) production technology. This way we demonstrate the robustness of the main results.

Of course, occupation, labor supply, and portfolio choices are not independent of each other, but we consider them in separation and connect them later to reduce the notational complexity and make the exposure of the model more intuitive. As we demonstrate below, all these choices depend on the pair \((w_t,\frac{\rho _{t+1}}{r_{t+1}})\).

To reduce the complexity of the model and avoid unnecessary complications, we assume here that agents neither value the first-period consumption nor they discount the utility from the second-period consumption. In “Appendix,” we relax both assumptions and demonstrate the robustness of the main results under alternative specifications.

Macroeconomic literature offers several alternative justifications for a partial pledgeability of a firm’s profit for debt repayment. In particular, there is a costly-state-verification approach of Townsend (1979), Bernanke and Gertler (1989), and others, a moral hazard approach of Holmström and Tirole (1997) and others and an adverse selection approach of Hart and Moore (1994), Kiyotaki and Moore (1997), and others. In this paper, we will not argue which of the above stories offer a more plausible explanation for credit market imperfection. Instead, we will rely on the reduced form approach of Matsuyama (2007), and Holmström and Tirole (2011), to parameterize the severity of the credit market imperfections and analyze its role in the joint dynamics of income and income inequality.

As we see later, \(\ell _t=0.5\) is the optimal labor supply of depositors and the rental rate of capital is equal to the interest rate, \(\rho _{t+1}=r_{t+1}\), and guarantees young agents’ indifference between becoming a depositor or an entrepreneur.

When the rental rate of capital is greater than the interest rate, \(\rho _{t+1}>r_{t+1}\), then young agents have the incentive to supply more labor than depositors do, \(\ell _t>0.5\), and earn the higher labor income in order to overcome a borrowing constraint and the minimum investment requirement for setting up a firm.

Indeed, the empirical measure of the fraction of the population who plan to become entrepreneurs is too small for changes in their labor supply behavior to have large effects on the aggregate labor supply. However, one can interpret young agents in the model more broadly as ones who are working to buy a house, send their children to college, or make other discrete choices that are associated with the minimum investment requirements.

It should be highlighted here that the equilibrium wage satisfies \(w_t \in [A,T]\) and the aggregate labor supply curve is backward bending for \(w_t \in [\lambda m, 2\lambda m]\). This means that the necessary condition for multiplicity of equilibria is the equilibrium wage to belong simultaneously to both sets [A, T] and \([\lambda m, 2\lambda m]\). That is, a necessary condition for multiplicity of equilibria is \([A,T] \cap [\lambda m,2\lambda m] \ne \varnothing \).

Self-employment opportunity is eliminated when \(A=0\).

Throughout the paper, the terms (a) income and labor income, and (b) income inequality and labor income inequality, are used interchangeably.

Existence of multiple equilibria with different income levels is consistent with the empirical finding of Kar et al. (2018).

It is worthwhile to highlight here that the relationship between the next period capital stock, \(k_{t+1}\), and the current capital stock, \(k_t\), is a correspondence rather than a function when there exist multiple equilibria. This complicates the identification and statistical inference of the model. This is because for some income levels there are multiple values of income inequality levels consistent with the model. This issue is mainly ignored in the econometric literature.

\(k_M\) given in (30) is the unique solution of \(W_2(k)=1\) if \(1 \in (\lambda m,2\lambda m)\).

Almost all countries have a minimum wage. Some countries, such as France, have a universal minimum across the entire economy, while other countries, such as New Zealand and South Africa, differentiate between sectors and types of workers. Typically, the minimum wage is set by the government and is revised periodically in consultation with business and labor organizations. Italy, Sweden, Norway, Finland, and Denmark are examples of developed nations where there is no minimum wage that is required by legislation. However, these countries (especially Nordic ones) have very high union participation rates. That is, minimum wage standards in these countries are set by collective bargaining agreements.

Based on British firm-level data, Draca et al. (2011) reports that an increase in the minimum wage has a significant and negative impact on the profitability of firms but has no significant effects either on employment or on productivity.

As in Reichlin (1986) and Woodford (1986), capital–labor complementarity plays a key role for indeterminacy of equilibrium.

Acemoglu D (1995) Public policy in a model of long-term unemployment. Economica 62(246):161–178

Aghion P, Bolton P (1997) A theory of trickle-down growth and development. Rev Econ Stud 64(2):151–172

Agliari A, Rillosi F, Vachadze G (2015) Credit market imperfection, financial market globalization, and catastrophic transition. Math Comput Simul 108:41–62

Agliari A, Vachadze G (2011) Homoclinic and heteroclinic bifurcations in an overlapping generations model with credit market imperfection. Comput Econ 38(3):241–260

Agliari A, Vachadze G (2014) Credit market imperfection, labor supply complementarity, and output volatility. Econ Model 38:45–56

Albanesi S (2007) Inflation and inequality. J Monet Econ 54(4):1088–1114

Arrow K (1974) The theory of discrimination. In: Ashenfelter O, Rees A (eds) Discrimination on labor markets. Princeton University Press, Princeton

Banerjee A, Newman AF (1993) Occupational choice and the process of development. J Polit Econ 101(2):274–298

Barsky R, Sims E (2012) Information, animal spirits, and the meaning of innovations in consumer confidence. Am Econ Rev 102(4):1343–1377

Bernanke B, Gertler M (1989) Agency costs, net worth, and business fluctuations. Am Econ Rev 79(1):14–31

Berndt E (1976) Reconciling alternative estimates of the elasticity of substitution. Rev Econ Stat 58(1):59–68

Blanchard O (1993) Consumption and the recession of 1990–1991. Am Econ Rev 83(2):270–274

Blank R (1989) Disaggregating the effect of the business cycle on the distribution of income. Economica 56:141–163

Botta A, Caverzasi E, Russo A, Gallegati M, Stiglitz J (2019) Inequality and finance in a rent economy. J Econ Behav Organ. https://doi.org/10.1016/j.jebo.2019.02.013CrossRef

Brueckner M, Kikuchi T, Vachadze G (2016) Effects of income growth on domestic saving rates: the role of poverty and borrowing constraints. ANU working papers in economics and econometrics, Australian National University, College of Business and Economics, School of Economics

Card D, Krueger A (1994) Minimum wages and employment: a case study of the fast-food industry in New Jersey and Pennsylvania. Am Econ Rev 84(4):772–793

Card D, Krueger A (2000) Minimum wages and employment: a case study of the fast-food industry in New Jersey and Pennsylvania. Am Econ Rev 90(5):1397–1420

Cardaci A, Saraceno F (2019) Between Scylla and Charybdis: income distribution, consumer credit, and business cycles. Econ Inq 57(2):953–971

Carroll C, Fuhrer J, Wilcox D (1994) Does consumer sentiment forecast household spending? If so, why? Am Econ Rev 84(5):1397–1408

Castaneda A, Diaz-Gimenez J, Rios-Rull J (1998) Exploring the income distribution business cycle dynamics. J Monet Econ 42(1):93–130

Chirinko R (2008) \(\sigma \): The long and short of it. J Macroecon 30(2):671–686

Coate S, Loury G (1993) Will affirmative-action policies eliminate negative stereotypes? Am Econ Rev 83(5):1220–1240

Dolmas J, Huffman G, Wynne M (2000) Inequality, inflation, and central bank independence. Can J Econ 33:271–287

Draca M, Machin S, Reenen J (2011) Minimum wages and firm profitability. Am Econ J Appl Econ 3(1):129–151

Galli R, van der Hoeven R (2001) Is inflation bad for income inequality: the importance of the initial rate of inflation. International Labor Organization Employment Paper 2001/29

Galor O, Zeira J (1993) Income distribution and macroeconomics. Rev Econ Stud 60(1):35–52

Garner C (1991) Forecasting consumer spending: Should economists pay attention to consumer confidence surveys? Econ Rev 76(3):57–71

Hall R (1993) Macro theory and the recession of 1990–1991. Am Econ Rev 83(2):275–279

Hamermesh D (1996) Labor demand. Princeton University Press, Princeton

Hart O, Moore J (1994) A theory of debt based on the inalienability of human capital. Quart J Econ 109(4):841–879

Hassler J, Storesletten K, Zilibotti F (2007) Democratic public good provision. J Econ Theory 133(1):127–151

Heer B, Sussmuth B (2007) Effects of inflation on wealth distribution: Do stock market participation fees and capital income taxation matter? J Econ Dyn Control 31(1):277–303

Hirsch B, Kaufman B, Zelenska T (2015) Minimum wage channels of adjustment. Ind Relat J Econ Soc 2(54):199–239

Holmström B, Tirole J (1997) Financial intermediation, loanable funds, and the real sector. Quart J Econ 112(3):663–691

Holmström B, Tirole J (2011) Inside and outside liquidity. MIT Press, Cambridge

Howrey P (2001) The predictive power of the index of consumer sentiment. Brook Pap Econ Activity 2001(1):175–207

Huang H, Lin S (2009) Non-linear finance-growth nexus. Econ Transit 17:439–466

Kar M, Nazlioglu S, Agir H (2011) Financial development and economic growth nexus in the MENA countries: bootstrap panel Granger causality analysis. Econ Model 28(1):685–693

Kar S, Roy A, Sen K (2018) The double trap: institutions and economic development. Econ Model (forthcoming)

Kikuchi T, Vachadze G (2018) Minimum investment requirement, financial market imperfection and self-fulfilling belief. J Evol Econ 28:305–332

Kiyotaki N, Moore J (1997) Credit cycles. J Polit Econ 105(2):211–248

Law S, Singh N (2014) Does too much finance harm economic growth? J Bank Finance 41:36–44

Lommerud K, Straume O, Vagstad S (2015) Mommy tracks and public policy: on self-fulfilling prophecies and gender gaps in hiring and promotion. J Econ Behav Organ 116:540–554

Maliar L, Maliar S, Mora J (2005) Income and wealth distributions along the business cycle: implications from the neoclassical growth model. B E J Macroecon 5(1):1–28

Matsuyama K (2000) Endogenous inequality. Rev Econ Stud 67(4):743–759

Matsuyama K (2007) Credit traps and credit cycles. Am Econ Rev 97(1):503–516

Mookherjee D, Ray D (2002) Contractual structure and wealth accumulation. Am Econ Rev 92(4):818–849

Mookherjee D, Ray D (2003) Persistent inequality. Rev Econ Stud 70(2):369–393

Nabi M (2015) Equity-financing, income inequality and capital accumulation. Econ Model 46:322–333

Parker J (1999) Spendthrift in America? On two decades of decline in the US saving rate. In: Bernanke B, Rotemberg J (eds) 1999 NBER macroeconomics annual, technical report, NBER

Phelps E (1972) The statistical theory of racism and sexism. Am Econ Rev 62(4):659–661

Piketty T (1995) Social mobility and redistributive politics. Quart J Econ 110(3):551–585

Piketty T (1997) The dynamics of the wealth distribution and the interest rate with credit rationing. Rev Econ Stud 64(2):173–189

Piketty T (1998) Self-fulfilling beliefs about social status. J Public Econ 70(1):115–132

Piketty T (2000) Theories of persistent inequality and intergenerational mobility. In Atkinson A, Bourguignon F (eds) Handbook of income distribution, 1st edn, vol 1, Chapter 08, Elsevier, pp 429–476

Reichlin P (1986) Equilibrium cycles in an overlapping generations economy with production. J Econ Theory 40(1):89–102

Slottje D (1987) Relative price changes and inequality in the size distribution of various components of income. J Bus Econ Stat 5:19–26

Stuart A, Ord K (1963) Kendall’s advanced theory of statistics. Distribution theory. Grifin, London

Townsend RM (1979) Optimal contracts and competitive markets with costly state verification. J Econ Theory 21(2):265–293

Vachadze G (2018) Credit market imperfection, minimum investment requirement, and endogenous income inequality. J Math Econ 76:62–79

Waltman J, McBride A, Camhout N (1998) Minimum wage increases and the business failure rate. J Econ Iss 32(1):219–223

Woodford M (1986) Stationary sunspot equilibria in a finance constrained economy. J Econ Theory 40(1):128–37

Titel: Financial development, income and income inequality
verfasst von: George Vachadze
Publikationsdatum: 13.04.2021
Verlag: Springer Berlin Heidelberg
Erschienen in: Journal of Economic Interaction and Coordination / Ausgabe 3/2021
Print ISSN: 1860-711X
Elektronische ISSN: 1860-7128
DOI: https://doi.org/10.1007/s11403-021-00321-w

Springer Professional

Abstract

Bitte loggen Sie sich ein, um Zugang zu Ihrer Lizenz zu erhalten.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Weitere Artikel der Ausgabe 3/2021

The evolution of norms within a society of captives

Can loss framing improve coordination in the minimum effort game?

On optimal regimes of knowledge exchange: a model of recombinant growth and firm networks

From agent-based modeling to actor-based reactive systems in the analysis of financial networks

The effect of social distancing on the reach of an epidemic in social networks

Estimating the proportion of informed and speculative traders in financial markets: evidence from exchange rate