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Research related to:  Income Distribution

Aspirations and Inequality

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This paper develops a theory in which society-wide economic outcomes shape individual milestones or aspirations, which affect the investment incentives of individuals. Through its impact on investments, individual milestones in turn affect ambient social outcomes. We explore this two-way link. A central feature is that aspirations that are moderately above an individual’s current standard of living tend to encourage investment, while still higher aspirations may lead to frustration and lower investment . . . 

Linking Conflict to Inequality and Polarization.

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In this paper we study a behavioral model of conflict that provides a basis for choosing certain indices of dispersion as indicators for conflict. We show that a suitable monotone transform of the equilibrium level of conflict can be proxied by a linear function of the Gini coefficient, the Herfindahl-Hirschman fractionalization index, and a specific measure of polarization due to Esteban and Ray.
Debraj Ray and Joan Esteban

The Distribution of Wealth and Fiscal Policy in Economies with Finitely Lived Agents

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We study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and intergenerational transmission of wealth. Financial markets are incomplete, exposing agents to both labor and capital income risk. We show that the stationary wealth distribution is a Pareto distribution in the right tail and that it is capital income risk, rather than labor income, that drives the properties of the right tail of the wealth distribution. We also study analytically the dependence of the distribution of wealth—of wealth inequality in particular—on various fiscal policy instruments like capital income taxes and estate taxes, and on different degrees of social mobility. We show that capital income and estate taxes can significantly reduce wealth inequality, as do institutions favoring social mobility. Finally, we calibrate the economy to match the Lorenz curve of the wealth distribution of the U.S. economy.
Alberto Bisin, Jess Benhabib and Shenghao Zhu

Inequality and Markets: Some Implications of Occupational Diversity

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This paper characterizes long run income distribution in a competitive economy with borrowing constraints. Parents decide both on financial bequests and investments in their children's education. The occupational structure is "rich": there is a continuum of occupations with varying entry costs that are imperfect substitutes in the production process. Occupational returns are endogenously determined by market conditions. If the span of occupational investments is wide enough, the wealth distribution is non- degenerate and long-run inequality arises. In this case, the average return to education must rise with the level of educational investment - the return to human capital is endogenously nonconcave. This finding, which contrasts with the usual presumption that the private return to human capital is decreasing, constitutes the central empirically testable proposition of this paper.
Dilip Mookherjee, Boston University and Debraj Ray, NYU

The Distribution of Wealth and Fiscal Policy in Economies with Finitely Lived Agents

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We study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and inter-generational transmission of wealth. Financial markets are incomplete, exposing agents to both labor and capital income risk. We show that the stationary wealth distribution is a Pareto distribution in the right tail and that it is capital income risk, rather than labor income, that drives the properties of the right tail of the wealth distribution. We also study analytically the dependence of the distribution of wealth, of wealth inequality in particular, on various fiscal policy instruments . . . 
Jes Benhabib, Alberto Bisin and Shenghao Zhu

The Political Economy of Normal Macroeconomic Pathologies.

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Recognizing that inflation and the macroeconomic policies that affect it can emanate from distributional conflicts in society, we examine the deep determinants of several nominal pathologies and related policy variables from a distributional perspective. We develop new instruments and use well- established existing instruments for these deep determinants and find that two deep determinants—societal divisions and democratic institutions—have a powerful and robust causal impact on nominal macroeconomic outcomes . . . 
Shanker atyanath and Arvind Subramanian

Social Cohesion, Institutions, and Growth

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Policy and institutional quality are to a large extent endogenous. While the truth of this statement is familiar to most development scholars, the implications of it have drawn relatively little empirical attention. Understanding more about this relationship matters, because ‘‘poor institutional quality’’ and ‘‘failure to implement better policies’’ are so frequently identified as the causes of growth collapses, endemic poverty, and civil conflict.
William Easterly, Jo Ritzen, and Michael Woolcock

The Product Cycle and Inequality

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This paper models the product cycle and explains how it relates to world inequality. In the model, both phenomena arise because skilled people have a comparative advantage in making high-tech products. The model can explain up to a 10:1 income differential between people and up to a 7:1 differential between countries. Tariff policies and intellectual-property protection have a much larger effect here than in some other models . . . 
Boyan Jovanovic, NYU