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Wealth Inequality and the Exploration of Novel Alternatives

Alessandro Spiganti

No 2022:02, Working Papers from Department of Economics, University of Venice "Ca' Foscari"

Abstract: I investigate whether wealth inequality hinders the discovery of novel alternatives in a competitive screening model. Agents can engage in experimentation, which may lead to the discovery of superior technologies, while wasting time with inferior ones. Talented agents are better at weeding out inferior actions, but talent is unobservable by lenders. When agents are poor, this causes an adverse selection problem and experimentation is also pursued by untalented agents. As economies become wealthier, this misallocation problem weakens. Higher inequality worsens the misallocation problem when the economy is rich, but can increase efficiency in poor economies.

Keywords: inequality of opportunity, bandit problem; unobservable talent, competitive screening (search for similar items in EconPapers)
JEL-codes: D53 D82 O31 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2022
New Economics Papers: this item is included in nep-fdg
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