Edgar J. Sanchez Carrera | Università degli Studi di Firenze (University of Florence) (original) (raw)
Papers by Edgar J. Sanchez Carrera
Journal of Dynamics and Games
Macroeconomic Dynamics
This paper deals with the phenomenon of poverty-trap regimes in Mexico, that is, self-reinforcing... more This paper deals with the phenomenon of poverty-trap regimes in Mexico, that is, self-reinforcing mechanisms in which municipalities which start poor remain poor. We develop a coordination game of poverty traps driven by strategic interactions of economic agents: people choose to complete or not their education levels since it might be excessively costly and unprofitable. A one-shot game is constructed and then converted into a system of differential equations in which strategies that perform relatively better become more abundant in the population. Applying evolutionary games and symbolic-regimes dynamics (nonparametric and nonlinear techniques), we show that Mexican regions are in poverty-trap regimes (stable and dynamically evolving low-level equilibria) characterized by incomplete education and low income since initial conditions (education and income per capita) are such (very precarious) that poverty is the stable steady-state situation. We examine scenarios to show that to ov...
Journal of Economic Interaction and Coordination
In this article, the author name Sladana Pavlinović Mršić was incorrectly written as Sladana Pavl... more In this article, the author name Sladana Pavlinović Mršić was incorrectly written as Sladana Pavlinović Mršć. The original article has been corrected.
Annals of Operations Research
The paper analyzes the optimal lockdown policy using the SQAIRD model over a network with three p... more The paper analyzes the optimal lockdown policy using the SQAIRD model over a network with three population groups (young, adult, and old). We show that different lockdown policies may be justified by different socioeconomic structures (objective cost functions that are either convex or concave). We also show that a lockdown policy is always better than a laissez-faire policy, and a targeted policy specific to each group outperforms a uniform policy. In our benchmark example, we consider the case of Italy. Our simulations show that: (a) a lockdown policy is always better than the laissez-faire policy because it limits the costs generated by the pandemic in an uncontrolled situation; (b) a group-specific targeted lockout policy is more effective than a uniform policy to the extent that the groups differ. The latter is a less expensive targeted policy (as it optimally minimizes direct, indirect, and vaccination costs), and it is equally effective in controlling the pandemic. One findin...
A threshold estimation technique applied to a panel of 13 Latin American countries over the 1970-... more A threshold estimation technique applied to a panel of 13 Latin American countries over the 1970-2011 time period, reveals the existence of a threshold level for the most popular index of income inequality (Gini's): below it past values of the index or per capita GDP appear to be unable to explain current variations in inequality, while beyond such a level the former may account for the decrease in current income inequality. So, there seems to be a turning point for income inequality though per capita GDP would have no effects on its dynamics. This result contributes further evidence on the dubious existence of the Kuznets Curve, and it links up with recent critical literature on the theme of increasing inequality and its shortcomings for growth
Economics of Innovation and New Technology, 2018
We present robust results on the empirical relationship among income inequality, innovation, and ... more We present robust results on the empirical relationship among income inequality, innovation, and economic growth for a panel dataset of 74 countries over the period 1996-2014. We estimate pairwise causality tests to show that there is bidirectional causality between GDP per capita and R&D, while R&D causes the Gini index of income inequality, and it causes human capital. Allowing coefficients to be different across cross-sections of countries, we get in any case a pairwise bidirectionality. By dynamic panel data estimations, when regressing R&D on GDP per capita, we obtain a threshold value of 0.16% of R&D such that for values above it there is economic growth. While regressing R&D on the Gini index, we get a threshold of 0.10% of R&D above which, the income distribution begins to improve. Finally, we estimate a growth equation that depends on R&D, income inequality, and physical capital. We obtain two thresholds, one of 38.79 for the Gini (above which the economic growth decreases), and one of 0.06% for R&D such that above it, economic growth is rising.
Journal of Economic Interaction and Coordination
In this paper, we model an evolutionary noncooperative game between politicians and citizens that... more In this paper, we model an evolutionary noncooperative game between politicians and citizens that, given the level of infection, describes the observed variety of mitigation policies and citizens’ compliance during the COVID-19 pandemic period. Our results show that different stable equilibria exist and that different ways/paths exist to reach these equilibria may be present, depending on the choice of parameters. When the parameters are chosen opportunistically, in the short run, our model generates transitions between hard and soft policy measures to deal with the pandemic. In the long-run, convergence is achieved toward one of the possible stable steady states (obey or not obey lockdown rules) as functions of politicians’ and citizens’ incentives.
Journal of Economic Studies
PurposeThe authors analyse a growth model to explain how economic fluctuations are primarily driv... more PurposeThe authors analyse a growth model to explain how economic fluctuations are primarily driven by productive capacities (i.e. capacity utilization driven by innovations and know-how) and productive inefficiencies.Design/methodology/approachThis study’s methodology consists of the combination of the economic growth model, à la Solow–Swan, with a sigmoidal production function (in capital), which may explain growth, poverty traps or fluctuations depending on the relative levels of inefficiencies, productive capacities or lack of know-how.FindingsThe authors show that economies may experience economic growth, poverty traps and/or fluctuations (i.e. cycles). Economic growth is reached when an economy experiences both a low level of inefficiencies and a high level of productive capacities while an economy falls into a poverty trap when there is a high level of inefficiencies in production. Instead, the economy gets in cycles when there is a large level of the lack of know-how and low...
Communications in Nonlinear Science and Numerical Simulation
International Journal of Applied Behavioral Economics, 2019
The aim of this article is to show that rational maximizer agents, i.e. economic rationality, do ... more The aim of this article is to show that rational maximizer agents, i.e. economic rationality, do not parsimoniously with rational credence, i.e. agents preferences driven by beliefs, traditions, idiosyncrasy, culture and/or customs depending on the social state representing a possible credence. The authors formulate a model on rational behavior, where either an economic and/or credence rationality results in the expected referential payoff of a rational preference driven by beliefs is not necessarily the optimal one in terms of having the largest payoff. Hence, the authors show the relationship between the expected payoff and instrumental or credence payoffs of choices, and what justifies choosing the latter when, ultimately, it is the former that maximizes your payoff. Finally, the authors conclude that agents' ordinary decisions may consider together both to the economic rationality and credence rationality, given their certain constraints on information, beliefs, and resources.
The B.E. Journal of Macroeconomics, 2021
We study the interplay between the decision of firms to innovate and human capital. Based on a dy... more We study the interplay between the decision of firms to innovate and human capital. Based on a dynamic evolutionary model, we show that in the presence of a high stock of human capital, an advanced economy can remain caught in an “innovation trap”. Following the literature on endogenous growth, R&D investments and human capital are modeled as strategic complements. Skilled workers increase productivity and enjoy a wage premium if they are employed in the R&D sector, while they receive the same wage as unskilled workers if they are employed in the production sector. We model the evolutionary dynamics of the share of innovative firms and human capital to determine the conditions under which an economy converges to a high, low or mixed state of innovation.
Games and Dynamics in Economics, 2020
The paper aims to study the co-evolution dynamics of human capital and innovative firms by means ... more The paper aims to study the co-evolution dynamics of human capital and innovative firms by means of an evolutionary game theory model. We analyze the properties of the model, showing that if the demand for skilled labor is higher than its supply, then innovative firms may have an incentive to become non-innovative and stop hiring skilled workers. If, by contrast, the supply of skilled labor is higher than its demand, then there could be incentives for non-innovative firms to become innovative. Then, we introduce the dynamic extension of the model, applying a replicator dynamics equation for the fraction of innovative firms and the fraction of skilled workers. The steady states of the system are identified and as the most interesting one, the interior steady state, is discussed. Subsequently some simplified versions of the model are proposed and studied. By means of such analysis, we claim that a policy oriented to increasing the stock of skilled labor can set the economy on a positive path towards technological development.
Journal of Dynamics & Games, 2020
In recent years concerns about poverty traps have risen to the forefront of policy. Accordingly, ... more In recent years concerns about poverty traps have risen to the forefront of policy. Accordingly, the decision on investing or waiting in specific sectors or locations of poor countries is in part assigned to the government of that country. We study the optimal timing of a foreign direct investment (FDI) where the returns are stochastic and the cost irreversible. A model of real option value compares the benefits and costs of a risky FDI with those of a riskless official development assistance (ODA). Once FDIs take place, the local government can shift ODAs towards different sectors or locations to hinder poverty. We show that with uncertainty and irreversibility, the policy decision has an opportunity value that must be included as a part of the full value of the FDI. This option value is highly sensitive to uncertainty over the future returns, so that changing actual economic conditions in poor countries can have a large impact on the poverty trap. Simulations show that this option value can be significant to explain the prevalence of hysteresis, that is the tendency of a poor country to persist in poverty.
Metroeconomica, 2020
The processes and the reasons for democratization of a country are a topic that captures and has ... more The processes and the reasons for democratization of a country are a topic that captures and has captured the attention of several scholars during the last decades. Democracies are known to be
Structural Change and Economic Dynamics, 2019
Social Dynamics aims at providing a unifying view on the evolution of social systems, including s... more Social Dynamics aims at providing a unifying view on the evolution of social systems, including social conflicts and dilemmas, interactions between populations and the environment, financial markets and the broader macroeconomy, by looking at the interplay between individual behavior at the micro-level and collective behaviors at the macro-level. This view emphasizes the role of boundedly rational behavior based on local information and conditioned by psychological biases, the interactions among heterogeneous agents and the resulting aggregate behaviors which, in turn, provide feedback to individual decisions.....
Economic Analysis and Policy, 2018
In past decades, a relevant strand of literature has found corruption to be an important determin... more In past decades, a relevant strand of literature has found corruption to be an important determinant of income inequality. In this paper, it is argued that a reverse causal relationship between corruption and income inequality might exist. We claim that income inequality could in fact be responsible for fostering corruption, which may be a reaction to a perceived unfair income distribution. Looking at a panel of 50 countries from 1995-2015, we show that the direction of causality between corruption and income inequality is country-specific and may be bidirectional. Using a dynamic GMM model, we robustly find that income inequality positively affects corruption, while corruption does not appear to be significant in the determination of income inequality, therefore contradicting the existing empirical literature on this topic.
Structural Change and Economic Dynamics, 2019
This study explores the dynamic relationship between income inequality and economic growth by usi... more This study explores the dynamic relationship between income inequality and economic growth by using a non-parametric approach and numerical taxonomy as a research method based on data symbolization and clustering methods. The study uses annual data of the GINI index (considering two databases, i.e. the Standardized World Income Inequality Database (SWIID) and the Estimated Household Income Inequality Data Set (EHII)) and the Per Capita GDP Growth Rates (economic growth variable) for two samples, i.e. 38 countries between 1980 and 2015, and 23 countries during the period 1980-2010. This novel methodology is used to detect the existence of clusters of countries sharing similar economic performance that are characterized by the income inequality variable. Once the homogeneous clusters are fixed, using a dynamic econometric approach, we study the Granger causal relationship between economic growth and income inequality, and the positive or negative long-run effects. Our results show that in advanced economies there is an economic growth policy supporting income distribution, while in poor or developing economies economic growth is enhanced by income concentration.
World Development Perspectives, 2019
Whether corruption can be conducive or not to income inequality has been the focus of interest in... more Whether corruption can be conducive or not to income inequality has been the focus of interest in the last decades. To the best of our knowledge, however, none has investigated the possibility that income inequality may foster corruption. In this research note, we argue that corruption may be the response of a (perceived) unfair income inequality. Analyzing 34 OECD countries during the period 1995-2011, some tests suggest that causality between corruption and income inequality is country specific. Even more, we found that corruption increases income inequality, and income inequality affects positively corruption.
Empirical Economics, 2018
In a perfectly competitive labor market, wage rates are determined by labor productivity, so that... more In a perfectly competitive labor market, wage rates are determined by labor productivity, so that wage dispersion reflects the marginal contribution to product of the different workers. Accordingly, wage inequality cannot be treated as an independent variable in a model of productivity, and thus economists have paid little attention to this relation. This paper studies the effects of wage inequality on labor productivity. We claim that wage inequality can lead to lower effort among workers who receive lower wages and hence lead in turn to lower aggregate labor productivity because of the lower aggregate effort level. To guide the empirical analysis, we look at aggregate panel data to investigate whether there is a relationship between wage inequality and average labor productivity. We use data for 34 OECD countries in the period 1995-2007, and by allowing country fixed effects, we exploit the longitudinal dimension of the data. We find that large wage inequality is associated with lower labor productivity. The opinions expressed in this publication are those of the authors and do not necessarily reflect the official opinion of the Italian Ministry of Economy and Finance.
Journal of Evolutionary Economics, 2018
Standard growth theory teaches us that poverty traps are stable-low level balanced growth paths t... more Standard growth theory teaches us that poverty traps are stable-low level balanced growth paths to which economies gravitate due to adverse initial conditions or poor equilibrium selection. In other words, societies fail to take off into sustained growth because they started poor, or because they cannot create institutions that coordinate their investments successfully. This paper explains this pernicious form of coordination failure as an evolutionary game between firms and workers. Rates of return of innovative firms depend on average skilled workers, and rates of return on skilled workers depend on aggregate innovative firms' investments. So, in poor economies with a large fraction of unskilled workers or non-innovative firms, imitative strategies do not support a takeoff into sustained growth. To achieve that takeoff , the society should subsidize the cost of education and/or skill premia through a tax system on income until the economy builds a critical mass of high-profile economic agents.
Journal of Dynamics and Games
Macroeconomic Dynamics
This paper deals with the phenomenon of poverty-trap regimes in Mexico, that is, self-reinforcing... more This paper deals with the phenomenon of poverty-trap regimes in Mexico, that is, self-reinforcing mechanisms in which municipalities which start poor remain poor. We develop a coordination game of poverty traps driven by strategic interactions of economic agents: people choose to complete or not their education levels since it might be excessively costly and unprofitable. A one-shot game is constructed and then converted into a system of differential equations in which strategies that perform relatively better become more abundant in the population. Applying evolutionary games and symbolic-regimes dynamics (nonparametric and nonlinear techniques), we show that Mexican regions are in poverty-trap regimes (stable and dynamically evolving low-level equilibria) characterized by incomplete education and low income since initial conditions (education and income per capita) are such (very precarious) that poverty is the stable steady-state situation. We examine scenarios to show that to ov...
Journal of Economic Interaction and Coordination
In this article, the author name Sladana Pavlinović Mršić was incorrectly written as Sladana Pavl... more In this article, the author name Sladana Pavlinović Mršić was incorrectly written as Sladana Pavlinović Mršć. The original article has been corrected.
Annals of Operations Research
The paper analyzes the optimal lockdown policy using the SQAIRD model over a network with three p... more The paper analyzes the optimal lockdown policy using the SQAIRD model over a network with three population groups (young, adult, and old). We show that different lockdown policies may be justified by different socioeconomic structures (objective cost functions that are either convex or concave). We also show that a lockdown policy is always better than a laissez-faire policy, and a targeted policy specific to each group outperforms a uniform policy. In our benchmark example, we consider the case of Italy. Our simulations show that: (a) a lockdown policy is always better than the laissez-faire policy because it limits the costs generated by the pandemic in an uncontrolled situation; (b) a group-specific targeted lockout policy is more effective than a uniform policy to the extent that the groups differ. The latter is a less expensive targeted policy (as it optimally minimizes direct, indirect, and vaccination costs), and it is equally effective in controlling the pandemic. One findin...
A threshold estimation technique applied to a panel of 13 Latin American countries over the 1970-... more A threshold estimation technique applied to a panel of 13 Latin American countries over the 1970-2011 time period, reveals the existence of a threshold level for the most popular index of income inequality (Gini's): below it past values of the index or per capita GDP appear to be unable to explain current variations in inequality, while beyond such a level the former may account for the decrease in current income inequality. So, there seems to be a turning point for income inequality though per capita GDP would have no effects on its dynamics. This result contributes further evidence on the dubious existence of the Kuznets Curve, and it links up with recent critical literature on the theme of increasing inequality and its shortcomings for growth
Economics of Innovation and New Technology, 2018
We present robust results on the empirical relationship among income inequality, innovation, and ... more We present robust results on the empirical relationship among income inequality, innovation, and economic growth for a panel dataset of 74 countries over the period 1996-2014. We estimate pairwise causality tests to show that there is bidirectional causality between GDP per capita and R&D, while R&D causes the Gini index of income inequality, and it causes human capital. Allowing coefficients to be different across cross-sections of countries, we get in any case a pairwise bidirectionality. By dynamic panel data estimations, when regressing R&D on GDP per capita, we obtain a threshold value of 0.16% of R&D such that for values above it there is economic growth. While regressing R&D on the Gini index, we get a threshold of 0.10% of R&D above which, the income distribution begins to improve. Finally, we estimate a growth equation that depends on R&D, income inequality, and physical capital. We obtain two thresholds, one of 38.79 for the Gini (above which the economic growth decreases), and one of 0.06% for R&D such that above it, economic growth is rising.
Journal of Economic Interaction and Coordination
In this paper, we model an evolutionary noncooperative game between politicians and citizens that... more In this paper, we model an evolutionary noncooperative game between politicians and citizens that, given the level of infection, describes the observed variety of mitigation policies and citizens’ compliance during the COVID-19 pandemic period. Our results show that different stable equilibria exist and that different ways/paths exist to reach these equilibria may be present, depending on the choice of parameters. When the parameters are chosen opportunistically, in the short run, our model generates transitions between hard and soft policy measures to deal with the pandemic. In the long-run, convergence is achieved toward one of the possible stable steady states (obey or not obey lockdown rules) as functions of politicians’ and citizens’ incentives.
Journal of Economic Studies
PurposeThe authors analyse a growth model to explain how economic fluctuations are primarily driv... more PurposeThe authors analyse a growth model to explain how economic fluctuations are primarily driven by productive capacities (i.e. capacity utilization driven by innovations and know-how) and productive inefficiencies.Design/methodology/approachThis study’s methodology consists of the combination of the economic growth model, à la Solow–Swan, with a sigmoidal production function (in capital), which may explain growth, poverty traps or fluctuations depending on the relative levels of inefficiencies, productive capacities or lack of know-how.FindingsThe authors show that economies may experience economic growth, poverty traps and/or fluctuations (i.e. cycles). Economic growth is reached when an economy experiences both a low level of inefficiencies and a high level of productive capacities while an economy falls into a poverty trap when there is a high level of inefficiencies in production. Instead, the economy gets in cycles when there is a large level of the lack of know-how and low...
Communications in Nonlinear Science and Numerical Simulation
International Journal of Applied Behavioral Economics, 2019
The aim of this article is to show that rational maximizer agents, i.e. economic rationality, do ... more The aim of this article is to show that rational maximizer agents, i.e. economic rationality, do not parsimoniously with rational credence, i.e. agents preferences driven by beliefs, traditions, idiosyncrasy, culture and/or customs depending on the social state representing a possible credence. The authors formulate a model on rational behavior, where either an economic and/or credence rationality results in the expected referential payoff of a rational preference driven by beliefs is not necessarily the optimal one in terms of having the largest payoff. Hence, the authors show the relationship between the expected payoff and instrumental or credence payoffs of choices, and what justifies choosing the latter when, ultimately, it is the former that maximizes your payoff. Finally, the authors conclude that agents' ordinary decisions may consider together both to the economic rationality and credence rationality, given their certain constraints on information, beliefs, and resources.
The B.E. Journal of Macroeconomics, 2021
We study the interplay between the decision of firms to innovate and human capital. Based on a dy... more We study the interplay between the decision of firms to innovate and human capital. Based on a dynamic evolutionary model, we show that in the presence of a high stock of human capital, an advanced economy can remain caught in an “innovation trap”. Following the literature on endogenous growth, R&D investments and human capital are modeled as strategic complements. Skilled workers increase productivity and enjoy a wage premium if they are employed in the R&D sector, while they receive the same wage as unskilled workers if they are employed in the production sector. We model the evolutionary dynamics of the share of innovative firms and human capital to determine the conditions under which an economy converges to a high, low or mixed state of innovation.
Games and Dynamics in Economics, 2020
The paper aims to study the co-evolution dynamics of human capital and innovative firms by means ... more The paper aims to study the co-evolution dynamics of human capital and innovative firms by means of an evolutionary game theory model. We analyze the properties of the model, showing that if the demand for skilled labor is higher than its supply, then innovative firms may have an incentive to become non-innovative and stop hiring skilled workers. If, by contrast, the supply of skilled labor is higher than its demand, then there could be incentives for non-innovative firms to become innovative. Then, we introduce the dynamic extension of the model, applying a replicator dynamics equation for the fraction of innovative firms and the fraction of skilled workers. The steady states of the system are identified and as the most interesting one, the interior steady state, is discussed. Subsequently some simplified versions of the model are proposed and studied. By means of such analysis, we claim that a policy oriented to increasing the stock of skilled labor can set the economy on a positive path towards technological development.
Journal of Dynamics & Games, 2020
In recent years concerns about poverty traps have risen to the forefront of policy. Accordingly, ... more In recent years concerns about poverty traps have risen to the forefront of policy. Accordingly, the decision on investing or waiting in specific sectors or locations of poor countries is in part assigned to the government of that country. We study the optimal timing of a foreign direct investment (FDI) where the returns are stochastic and the cost irreversible. A model of real option value compares the benefits and costs of a risky FDI with those of a riskless official development assistance (ODA). Once FDIs take place, the local government can shift ODAs towards different sectors or locations to hinder poverty. We show that with uncertainty and irreversibility, the policy decision has an opportunity value that must be included as a part of the full value of the FDI. This option value is highly sensitive to uncertainty over the future returns, so that changing actual economic conditions in poor countries can have a large impact on the poverty trap. Simulations show that this option value can be significant to explain the prevalence of hysteresis, that is the tendency of a poor country to persist in poverty.
Metroeconomica, 2020
The processes and the reasons for democratization of a country are a topic that captures and has ... more The processes and the reasons for democratization of a country are a topic that captures and has captured the attention of several scholars during the last decades. Democracies are known to be
Structural Change and Economic Dynamics, 2019
Social Dynamics aims at providing a unifying view on the evolution of social systems, including s... more Social Dynamics aims at providing a unifying view on the evolution of social systems, including social conflicts and dilemmas, interactions between populations and the environment, financial markets and the broader macroeconomy, by looking at the interplay between individual behavior at the micro-level and collective behaviors at the macro-level. This view emphasizes the role of boundedly rational behavior based on local information and conditioned by psychological biases, the interactions among heterogeneous agents and the resulting aggregate behaviors which, in turn, provide feedback to individual decisions.....
Economic Analysis and Policy, 2018
In past decades, a relevant strand of literature has found corruption to be an important determin... more In past decades, a relevant strand of literature has found corruption to be an important determinant of income inequality. In this paper, it is argued that a reverse causal relationship between corruption and income inequality might exist. We claim that income inequality could in fact be responsible for fostering corruption, which may be a reaction to a perceived unfair income distribution. Looking at a panel of 50 countries from 1995-2015, we show that the direction of causality between corruption and income inequality is country-specific and may be bidirectional. Using a dynamic GMM model, we robustly find that income inequality positively affects corruption, while corruption does not appear to be significant in the determination of income inequality, therefore contradicting the existing empirical literature on this topic.
Structural Change and Economic Dynamics, 2019
This study explores the dynamic relationship between income inequality and economic growth by usi... more This study explores the dynamic relationship between income inequality and economic growth by using a non-parametric approach and numerical taxonomy as a research method based on data symbolization and clustering methods. The study uses annual data of the GINI index (considering two databases, i.e. the Standardized World Income Inequality Database (SWIID) and the Estimated Household Income Inequality Data Set (EHII)) and the Per Capita GDP Growth Rates (economic growth variable) for two samples, i.e. 38 countries between 1980 and 2015, and 23 countries during the period 1980-2010. This novel methodology is used to detect the existence of clusters of countries sharing similar economic performance that are characterized by the income inequality variable. Once the homogeneous clusters are fixed, using a dynamic econometric approach, we study the Granger causal relationship between economic growth and income inequality, and the positive or negative long-run effects. Our results show that in advanced economies there is an economic growth policy supporting income distribution, while in poor or developing economies economic growth is enhanced by income concentration.
World Development Perspectives, 2019
Whether corruption can be conducive or not to income inequality has been the focus of interest in... more Whether corruption can be conducive or not to income inequality has been the focus of interest in the last decades. To the best of our knowledge, however, none has investigated the possibility that income inequality may foster corruption. In this research note, we argue that corruption may be the response of a (perceived) unfair income inequality. Analyzing 34 OECD countries during the period 1995-2011, some tests suggest that causality between corruption and income inequality is country specific. Even more, we found that corruption increases income inequality, and income inequality affects positively corruption.
Empirical Economics, 2018
In a perfectly competitive labor market, wage rates are determined by labor productivity, so that... more In a perfectly competitive labor market, wage rates are determined by labor productivity, so that wage dispersion reflects the marginal contribution to product of the different workers. Accordingly, wage inequality cannot be treated as an independent variable in a model of productivity, and thus economists have paid little attention to this relation. This paper studies the effects of wage inequality on labor productivity. We claim that wage inequality can lead to lower effort among workers who receive lower wages and hence lead in turn to lower aggregate labor productivity because of the lower aggregate effort level. To guide the empirical analysis, we look at aggregate panel data to investigate whether there is a relationship between wage inequality and average labor productivity. We use data for 34 OECD countries in the period 1995-2007, and by allowing country fixed effects, we exploit the longitudinal dimension of the data. We find that large wage inequality is associated with lower labor productivity. The opinions expressed in this publication are those of the authors and do not necessarily reflect the official opinion of the Italian Ministry of Economy and Finance.
Journal of Evolutionary Economics, 2018
Standard growth theory teaches us that poverty traps are stable-low level balanced growth paths t... more Standard growth theory teaches us that poverty traps are stable-low level balanced growth paths to which economies gravitate due to adverse initial conditions or poor equilibrium selection. In other words, societies fail to take off into sustained growth because they started poor, or because they cannot create institutions that coordinate their investments successfully. This paper explains this pernicious form of coordination failure as an evolutionary game between firms and workers. Rates of return of innovative firms depend on average skilled workers, and rates of return on skilled workers depend on aggregate innovative firms' investments. So, in poor economies with a large fraction of unskilled workers or non-innovative firms, imitative strategies do not support a takeoff into sustained growth. To achieve that takeoff , the society should subsidize the cost of education and/or skill premia through a tax system on income until the economy builds a critical mass of high-profile economic agents.
Evolutionary Games and Poverty Traps
This book explores how persistent states of underdevelopment can arise in strategic environments ... more This book explores how persistent states of underdevelopment can arise in strategic environments in which players are imitative rather than fully rational. Standard growth theory teaches that poverty traps are stable, low-level balanced growth paths to which economies gravitate due to adverse initial conditions or poor equilibrium selection. In other words, societies fail to take off into sustained growth because they started out as poor, with, for example, low longevity or poor human capital, or because they cannot invent institutions that successfully coordinate their investments.
Evolutionary Games and Poverty Traps explains this pernicious form of coordination failure as a game between economic agents, such as, for example, firms investing in research and development and workers investing in human capital. Rates of return on research and development depend on average human capital, and rates of return on human capital depend on aggregate research and development spending. The outcome is a self-confirming equilibrium in evolutionary stable strategies in which unsuccessful players imitate successful ones. This equilibrium is particularly interesting in that in poor economies with a large fraction of low-human-capital workers or low research and development firms, imitative strategies do not support a take-off into sustained growth. To achieve such a take-off, society should subsidize the cost of education or research and development until the economy builds a critical mass of human capital or research and development.