Birds of a Feather: Life Cycle Social Externalities, Heterogeneous Beliefs, and Development Bias

Young-Chul Kim () and Glenn C. Loury ()
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Young-Chul Kim: Department of Economics, Sogang University, Korea
Glenn C. Loury: Department of Economics, Brown University, USA

No 2104, Working Papers from Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy)

Abstract: This study models how social networks that span an individual’s entire life cycle affect human capital acquisition and subsequent employment outcomes. Early-life social affiliations can affect the cost of human capital, while later-life connections can affect the earnings derived from previously acquired human capital. The dynamic interactions between early-life network-mediated investments and later-life networkmediated returns give rise to multiple, fully consistent, rational expectations equilibria. These self-fulling expectations imply development bias, wherein heterogeneous beliefs about the future persistently generate unequal outcomes among social groups. When the model is applied to a country’s development cycle, the theoretical findings suggest that, while between-group inequality can reduce economic growth in a mature economy, it may increase growth in an economy in the initial stages of its development. Relevant historical examples of between-group dynamics are discussed extensively.

Keywords: Group Inequality; Social Externality; Development Bias; Expectation Trap (search for similar items in EconPapers)
JEL-codes: I30 J15 Z13 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2021
New Economics Papers: this item is included in nep-gro, nep-ltv and nep-net
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Persistent link: https://EconPapers.repec.org/RePEc:sgo:wpaper:2104

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