Numerical Simulations of How Economic Inequality Increases in Democratic Countries

Harashima, Taiji (2023): Numerical Simulations of How Economic Inequality Increases in Democratic Countries.

Abstract

It is not easy to perform a numerical simulation of the path to a steady state in dynamic economic growth models in which households behave by generating rational expectations. It is much easier, however, if households are assumed to behave according to a procedure based on the maximum degree of comfortability (MDC), where MDC indicates the state at which a household feels most comfortable with its combination of income and assets. In this paper, I simulate how economic inequality increases in democratic countries under the supposition that households behave according to the MDC-based procedure. The results indicate that high levels of economic inequality can be generated and even increase in a democracy. As causes, I postulate households’ misunderstandings of the economic situation, a government against certain groups in the economy, or an upward trend in temporary rent incomes. I then present a criterion for establishing the socially acceptable level of economic inequality and point out a practical shortfall arising from the inability to distinguish temporary economic rents.

• Item Type: MPRA Paper
• Language: English
• Keywords: Democracy; Economic rent; Economic inequality; Government transfer; Heterogeneity; Simulation
• Subjects: E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E17 - Forecasting and Simulation: Models and Applications; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E60 - General; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy ; Stabilization ; Treasury Policy; H - Public Economics > H2 - Taxation, Subsidies, and Revenue

References

Atkinson, Anthony B., Thomas Piketty and Emmanuel Saez (2011) “Top Incomes in the Long Run of History,” Journal of Economic Literature, Vol. 49, No. 1, pp. 3-71.

Autor, David H., Lawrence F. Katz and Alan B. Krueger (1998) “Computing Inequality: Have Computers Changed the Labor Market?” The Quarterly Journal of Economics, Vol. 113, No. 4, pp. 1169-1213

Autor, David H., Frank Levy and Richard J. Murnane (2003) “The Skill Content of Recent Technological Change: An Empirical Exploration,” The Quarterly Journal of Economics, Vol. 118, No. 4, pp. 1279-1333.

Becker, Robert A. (1980) “On the Long-run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households,” The Quarterly Journal of Economics, Vol. 95, No. 2, pp. 375–382.

Card, David and John E. DiNardo (2002) “Skill-Biased Technological Change and Rising Wage Inequality: Some Problems and Puzzles,” Journal of Labor Economics, Vol. 20, No. 4, pp. 733- 783　

Goldberg, Pinelopi Koujianou and Nina Pavcnik (2007) “Distributional Effects of Globalization in Developing Countries,” Journal of Economic Literature, Vol. 45, No. 1, pp. 39-82.

Harashima, Taiji (2010) “Sustainable Heterogeneity: Inequality, Growth, and Social Welfare in a Heterogeneous Population,” MPRA (The Munich Personal RePEc Archive) Paper No. 24233.

Harashima, Taiji (2012) “Sustainable Heterogeneity as the Unique Socially Optimal Allocation for Almost All Social Welfare Functions,” MPRA (The Munich Personal RePEc Archive) Paper No. 40938.

Harashima, Taiji (2014) “Sustainable Heterogeneity in Exogenous Growth Models: The Socially Optimal Distribution by Government’s Intervention,” Theoretical and Practical Research in Economic Fields, Vol. 5, No. 1, pp. 73-100.

Harashima, Taiji (2016) “Ranking Value and Preference: A Model of Superstardom,” MPRA (The Munich Personal RePEc Archive) Paper No. 74626.

Harashima, Taiji (2017a) “The Mechanism behind Product Differentiation: An Economic Model” Journal of Advanced Research in Management, Vol. 8, No. 2. pp. 95-111.

Harashima, Taiji (2017b) “Sustainable Heterogeneity: Inequality, Growth, and Social Welfare in a Heterogeneous Population,” in Japanese, Journal of Kanazawa Seiryo University, Vol. 51, No.1, pp. 31-80. （原嶋　耐治「持続可能な非均質性―均質ではない構成員からなる経済における不平等、経済成長及び社会的厚生―」 『金沢星稜大学論集』 第51巻第1号31～80頁）

Harashima, Taiji (2018a) “Do Households Actually Generate Rational Expectations? “Invisible Hand” for Steady State,” MPRA (The Munich Personal RePEc Archive) Paper No. 88822.

Harashima, Taiji (2018b) “Ranking Value and Preference: A Model of Superstardom,” in Japanese, Journal of Kanazawa Seiryo University, Vol. 52, No.1, pp. 27-40. （「順位価値と順位選好―スーパースターの経済モデル―」『金沢星稜大学論集』第52巻第1号27～40頁）

Harashima, Taiji (2018c) “Superstars in Team Sports: An Economic Model,” MPRA (The Munich Personal RePEc Archive) Paper No. 86360.

Harashima, Taiji (2018d) “Why Is Executive Compensation So High? A Model of Executive Compensation” Journal of Advanced Research in Management, Vol. 9, No. 2. pp. 59-68.

Harashima, Taiji (2019) “Do Households Actually Generate Rational Expectations? “Invisible Hand” for Steady State,” in Japanese, Journal of Kanazawa Seiryo University, Vol. 52, No.2, pp. 49-70.（「家計は実際に合理的期待を形成して行動しているのか―定常状態への「見えざる手」―」『金沢星稜大学論集』第52巻第2号49～70頁）

Harashima, Taiji (2020a) “Sustainable Heterogeneity as the Unique Socially Optimal Allocation for Almost All Social Welfare Functions,” in Japanese, Journal of Kanazawa Seiryo University, Vol. 54, No.1, pp. 71-95. （「殆ど全ての社会的厚生関数に対して唯一の社会的に最適な配分をもたらすものとしての持続可能な非均質性」『金沢星稜大学論集』第54巻第1号71～95頁）

Harashima, Taiji (2020b) “Economic Inequality Exacerbated by Economic Rents from Exploitative Contracting,” MPRA (The Munich Personal RePEc Archive) Paper No. 104178.

Harashima, Taiji (2020c) “An Alternative Rationale for the Necessity of an Inheritance Tax,” MPRA (The Munich Personal RePEc Archive) Paper No. 100015.

Harashima, Taiji (2020d) “Rethinking the Ability-to-Pay and Equal Sacrifice Principles of Taxation: An Alternative Rationale for a Progressive Income Tax,” MPRA (The Munich Personal RePEc Archive) Paper No. 102937.

Harashima, Taiji (2020e) “Preventing Widening Inequality: Economic Rents and Sustainable Heterogeneity,” MPRA (The Munich Personal RePEc Archive) Paper No. 103377.

Harashima, Taiji (2021a) “Consequence of Heterogeneous Economic Rents under the MDC-based Procedure,” Journal of Applied Economic Sciences, Vol. 16, No. 2. pp. 185-190.

Harashima, Taiji (2021b) “Superstars in Team Sports: An Economic Model,” in Japanese, Journal of Kanazawa Seiryo University, Vol. 55, No.1, pp. 39-51. （「チームスポーツにおけるスーパースターの経済モデル」『金沢星稜大学論集』第55巻第1号39～51頁）

Harashima, Taiji (2021c) “Economic Inequality and Heterogeneous Success Rates of Investment,” MPRA (The Munich Personal RePEc Archive) Paper No. 110688.

Harashima, Taiji (2021d) “Mechanisms that Make Economic Inequality Increase in Democratic Countries,” MPRA (The Munich Personal RePEc Archive) Paper No. 108535.

Harashima, Taiji (2021f) “Preventing Widening Inequality: Economic Rents and Sustainable Heterogeneity,” in Japanese, Journal of Kanazawa Seiryo University, Vol. 55, No.1, pp. 17-37. (「格差拡大を防ぐー経済レントと持続可能な非均質性」『金沢星稜大学論集』第55巻第1号17～37頁)

Harashima, Taiji (2022a) “A Theory of Inflation: The Law of Motion for Inflation under the MDC-based Procedure,” MPRA (The Munich Personal RePEc Archive) Paper No. 113161.

Harashima, Taiji (2022b) “A Theory of Inflation: The Law of Motion for Inflation under the MDC-based Procedure,” in Japanese, Journal of Kanazawa Seiryo University, Vol. 54, No.1. pp. 17～37. （「物価上昇に関する一理論：最快適状態依拠手順の下における物価の運動法則」『金沢星稜大学論集』第56巻第1号17～37頁）

Harashima, Taiji (2022c) “Numerical Simulations of Reaching a Steady State: No Need to Generate Any Rational Expectations,” Journal of Applied Economic Sciences, Vol. 17, No. 4. pp. 321-339.

Harashima, Taiji (2023) “Numerical Simulation of Reaching a Steady State: Effects of Economic Rents on Development of Economic Inequality,” MPRA (The Munich Personal RePEc Archive) Paper No. 117137.

Helpman, Elhanan (2016) “Globalization and Wage Inequality,” NBER Working Paper, No. 22944.

Kahneman, Daniel, Paul Slovic, and Amos Tversky (ed.) (1982) Judgment under Uncertainty: Heuristics and Biases, Cambridge University Press, NY.

Katz, Lawrence F. and Kevin M. Murphy (1992) “Changes in Relative Wages, 1963-1987: Supply and Demand Factors,” The Quarterly Journal of Economics, Vol. 107, No. 1, pp. 35-78.

Leamer, Edward E. (1998) “In Search of Stolper-Samuelson Linkages between International Trade and Lower Wages,” in Imports, Exports, and the American Worker, Susan M. Collins (ed), Brookings Institution Press, Washington, D.C.

Parker, Nicholas (2014) “Divergence: Wealth and Income Inequality in the United States,” EconSouth, Federal Reserve Bank of Atlanta, Vol. 16, No. 3.

Piketty, Thomas (2003), “Income Inequality in France, 1901–1998,” Journal of Political Economy, Vol. 111, No. 5, pp. 1004-1042.

Piketty, Thomas (2013) Le Capital au XXIe siècle translated by Arthur Goldhammer in English in 2014 with the title Capital in the Twenty-First Century, Belknap Press of Harvard University Press, Cambridge, MA.

Piketty, Thomas and Emmanuel Saez (2003) “Income Inequality in the United States, 1913–1998,” The Quarterly Journal of Economics, Vol. 118, No. 1, pp. 1-41.

Porter, Michael E. (1980) Competitive Strategy, Free Press, New York.

Porter, Michael E. (1985) Competitive Advantage, Free Press, New York.

Saez, Emmanuel and Gabriel Zucman (2016) “Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data,” The Quarterly Journal of Economics, Vol. 131, No. 2, pp. 519-578.