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Economic Inequality and Heterogeneous Success Rates of Investment

Harashima, Taiji (2021): Economic Inequality and Heterogeneous Success Rates of Investment.

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Abstract

Some investments succeed and others fail. Furthermore, the probability of success will differ among people who undertake investments. In this paper, we construct exogenous and endogenous growth models that show that this heterogeneity in success rates of investment can cause extreme economic inequality. A major implication of our models is that even if the success rates are only slightly heterogeneous, people with relatively higher success rates can accumulate a larger amount of capital than those with relatively lower success rates, and as a result, the latter cannot satisfy all of their optimality conditions leading to extremely high debt-to-consumption ratios and large indebtedness to the former group. I then modify the models to consider multilateral behavior and the necessity of government intervention to improve this situation by means of simultaneous heterogeneity. I find that to prevent such extreme economic inequality, it is indispensable for the government to intervene appropriately by transferring appropriate amounts of income from the former to the latter.

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