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Economic Inequality Exacerbated by Economic Rents from Exploitative Contracting

Harashima, Taiji (2020): Economic Inequality Exacerbated by Economic Rents from Exploitative Contracting.

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Abstract

According to contract theory, exploitative contracting probably exists widely and on a large scale, and it generates economic rents. In this paper, I show that the origin of these economic rents is heterogeneity in fluid intelligences, and heterogeneity in honesty aggravates the situation. Even without asymmetric information and irrationality, and even if economic agents have no malicious intent and are always honest, economic rents from mistakes in business deals are generated. Some households or family lines persistently obtain these economic rents with higher probability than others, and, as a result, extreme economic inequality will be generated. This means that there is a built-in mechanism such that the level of economic inequality in an economy is naturally exacerbated. Hence, a government has to intervene in economic activities to eliminate the negative effects of these economic rents by appropriately redistributing incomes among households.

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