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Does Inequality Hamper Innovation and Growth?

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  • Caiani, Alessandro
  • Russo, Alberto
  • Gallegati, Mauro

Abstract

The paper builds upon the Agent Based-Stock Flow Consistent model presented in Caiani et al. (2015) to analyze the relationship between income and wealth inequality and economic development. For this sake, the original model has been amended under three main dimensions: first, the households sector has been subdivided into workmen, office workers, researchers, and executives which compete on segmented labor markets. Conversely, firms are now characterized by a hierarchical organization structure which determines, according to firms’ output levels, their demand for each type of workers. Second, in order to account for the impact of income and wealth distribution on consumption patterns, different households classes - also representing different income groups - have diversified average propensities to consume and save. Finally, the model now embeds technological change in an evolutionary flavor, affecting labor productivity evolution in the consumption sector through product innovation in the capital sector, where firms invest in R&D and produce differentiated vintages of machineries. The model is then calibrated using realistic values for both income and wealth distribution across different income groups, and their average propensities to consume. Results of the simulation experiments suggest that more progressive tax schemes and labor market policies aiming to increase low and middle workers’ coordination, and to support their wage levels, concur to foster economic development and to reduce inequality, though the latter seem to be more effective under both respects. The model thus provides some evidence in favor of a wage-led growth regime, where improvements of middle-low levels workers’ conditions create positive systemic effects, which eventually trickle up also to high income-profit earners households.

Suggested Citation

  • Caiani, Alessandro & Russo, Alberto & Gallegati, Mauro, 2016. "Does Inequality Hamper Innovation and Growth?," MPRA Paper 71864, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:71864
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    Cited by:

    1. Elisa Palagi & Mauro Napoletano & Andrea Roventini & Jean-Luc Gaffard, 2017. "Inequality, Redistributive Policies and Multiplier Dynamics in an Agent-based Model with Credit Rationing," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 3(3), pages 367-387, November.
    2. repec:oup:indcch:v:27:y:2018:i:6:p:999-1014. is not listed on IDEAS
    3. Dosi, G. & Pereira, M.C. & Roventini, A. & Virgillito, M.E., 2017. "When more flexibility yields more fragility: The microfoundations of Keynesian aggregate unemployment," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 162-186.
    4. Giovanni Dosi & Marcelo C. Pereira & Andrea Roventini & Maria Enrica Virgillito, 2018. "What if supply-side policies are not enough ? The perverse interaction of flexibility and austerity," Sciences Po publications 2018-04, Sciences Po.
    5. Giovanni Dosi & Marcelo C. Pereira & Andrea Roventini & Maria Enrica Virgillito, 2016. "The Effects of Labour Market Reforms upon Unemployment and Income Inequalities: an Agent Based Model," Sciences Po publications 2016-24, Sciences Po.
    6. Papadopoulos, Georgios, 2018. "Income inequality, consumption, credit and credit risk in a data-driven agent-based model," MPRA Paper 89764, University Library of Munich, Germany.
    7. Tommaso Ciarli & André Lorentz & Marco Valente & Maria Savona, 2019. "Structural changes and growth regimes," Journal of Evolutionary Economics, Springer, vol. 29(1), pages 119-176, March.
    8. G Dosi & M C Pereira & A Roventini & M E Virgillito, 2018. "Causes and consequences of hysteresis: aggregate demand, productivity, and employment," Industrial and Corporate Change, Oxford University Press, vol. 27(6), pages 1015-1044.
    9. repec:oup:indcch:v:27:y:2018:i:6:p:1123-1154. is not listed on IDEAS
    10. Caiani, Alessandro & Russo, Alberto & Gallegati, Mauro, 2017. "Are higher wages good for business? An assessment under alternative innovation and investment scenarios," MPRA Paper 80439, University Library of Munich, Germany.
    11. Mauro Napoletano, 2017. "A Short Walk on the Wild Side: Agent-Based Models and their Implications for Macroeconomic Analysis," GREDEG Working Papers 2017-40, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
    12. repec:spr:italej:v:3:y:2017:i:3:d:10.1007_s40797-017-0065-z is not listed on IDEAS
    13. Eugenio Caverzasi & Alberto Russo, 2018. "Toward a new microfounded macroeconomics in the wake of the crisis," Industrial and Corporate Change, Oxford University Press, vol. 27(6), pages 999-1014.
    14. Fanti, Lucrezia, 2018. "An AB-SFC Model of Induced Technical Change along Classical and Keynesian Lines," MPRA Paper 86929, University Library of Munich, Germany.
    15. Mauro Napoletano, 2018. "A short walk on the wild side : agent based models and their implications for macroeconomic analysis," Sciences Po publications info:hdl:2441/2qdhj5485p9, Sciences Po.
    16. Amrita Saha & Tommaso Ciarli, 2018. "Innovation, Structural Change, and Inclusion. A Cross Country PVAR Analysis," SPRU Working Paper Series 2018-01, SPRU - Science Policy Research Unit, University of Sussex Business School.
    17. Giovanni Dosi & Marcelo C. Pereira & Andrea Roventini & Maria Enrica Virgillito, 2018. "Causes et consequences of hysteresis : aggregate demand, productivity and employment," Sciences Po publications info:hdl:2441/4h9cnu4n2k8, Sciences Po.
    18. Giovanni Dosi & Andrea Roventini, 2017. "Agent-Based Macroeconomics and Classical Political Economy: Some Italian Roots," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 3(3), pages 261-283, November.
    19. Lucrezia Fanti, 2018. "An AB-SFC Model of Induced Technical Change along Classical and Keynesian Lines," Working Papers 3/18, Sapienza University of Rome, DISS.
    20. Fanti, Lucrezia, 2018. "An AB-SFC Model of Induced Technical Change along Classical and Keynesian Lines," MPRA Paper 86645, University Library of Munich, Germany.

    More about this item

    Keywords

    Innovation; Inequality; Agent Based Macroeconomics; Stock Flow Consistent Models.;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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