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Inequality, Technology, and the Social Contract

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  • Roland Benabou

Abstract

The distribution of human capital and income lies at the center of a nexus of forces that shape a country's economic, institutional and technological structure. I develop here a unified model to analyze these interactions and their growth consequences. Five main issues are addressed. First, I identify the key factors that make both European-style "welfare state" and US-style "laissez-faire" social contracts sustainable.; I also compare the growth rates of these two politico-economic steady states, which are no Pareto-rankable. Second, I examine how technological evolutions affect the set of redistributive institutions that can be durably sustained, showing in particular how skill-biased technical change may cause the welfare state to unravel. Third, I model the endogenous determination of technology or organizational form that results from firms' tailoring the flexibility of their production processes to the distribution of workers' skills. The greater is human capital heterogeneity, the more flexible and wage-disequalizing is the equilibrium technology. Moreover, firms' choices tend to generate excessive flexibility, resulting in suboptimal growth or even self-sustaining technology-inequality traps. Fourth, I examine how institutions also shape the course of technology; thus, a world-wide shift in the technology frontier results in different evolutions of production processes and skill premia across countries with different social contracts. Finally, I ask what joint configurations of technology, inequality and redistributive policy are feasible in the long run, when all three are endogenous. I show in particular how the diffusion of technology leads to the exporting' of inequality across borders; and how this, in turn, generates spillovers between social contracts that make it more difficult for nations to maintain distinct institutions and social structures.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10371.

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Date of creation: Mar 2004
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Publication status: published as Benabou, Roland, 2005. "Inequality, Technology and the Social Contract," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 25, pages 1595-1638 Elsevier.
Handle: RePEc:nbr:nberwo:10371

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Cited by:
  1. Christopher Crowe, 2004. "Inflation, inequality and social conflict," LSE Research Online Documents on Economics 19932, London School of Economics and Political Science, LSE Library.
  2. Benabou, Roland & Tirole, Jean, 2004. "Belief in a Just World and Redistributive Politics," Papers 08-15-2005a, Princeton University, Research Program in Political Economy.
  3. Bombardini, Matilde & Gallipoli, Giovanni & Pupato, Germán, 2014. "Unobservable skill dispersion and comparative advantage," Journal of International Economics, Elsevier, vol. 92(2), pages 317-329.
  4. Vollrath, Dietrich, 2008. "Wealth Distribution and the Provision of Public Goods: Evidence from the United States," MPRA Paper 11534, University Library of Munich, Germany.
  5. Daron Acemoglu & James A. Robinson, 2008. "Persistence of Power, Elites, and Institutions," American Economic Review, American Economic Association, vol. 98(1), pages 267-93, March.
  6. Daron Acemoglu, 2007. "Equilibrium Bias of Technology," Econometrica, Econometric Society, vol. 75(5), pages 1371-1409, 09.
  7. Marianne Saam, 2005. "Openness To Trade as a Determinant of the Elasticity of Substitution between Capital and Labor," DEGIT Conference Papers c010_013, DEGIT, Dynamics, Economic Growth, and International Trade.

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