Economic Inequality and Heterogeneous Success Rates of Investment

Taiji Harashima

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Economic inequality; Success rate of investment; Heterogeneous ability (search for similar items in EconPapers)
JEL-codes: D63 E22 H24 (search for similar items in EconPapers)
Date: 2021-11-15
New Economics Papers: this item is included in nep-cwa, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:110688

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