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Understanding the causes of income inequality in complex economic systems

We suggest in this paper that inequality in economic systems can be profitably analysed using complex systems analysis. We explain how we can capture, analytically, complexity in an economic system by applying graph theory in networks. We then develop a highly stylised theoretical model of how income inequality arises naturally due to the fact that a skewed income distribution necessarily arises from “preferential attachment†in a complex economic system. We characterise this process, both in the market system broadly defined and, specifically, within a firm. It is argued that such a complex systems approach (despite being vastly simplified here) provides a superior basis for understanding income inequality compared to standard economic analysis.

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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 478.

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Date of creation: 10 May 2013
Date of revision:
Handle: RePEc:qld:uq2004:478
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  1. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
  2. Foster, John, 1993. "Economics and the Self-Organisation Approach: Alfred Marshall Revisited," Economic Journal, Royal Economic Society, vol. 103(419), pages 975-91, July.
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  4. Sheri M. Markose, 2004. "Computability and Evolutionary Complexity: Markets As Complex Adaptive Systems (CAS)," Economics Discussion Papers 574, University of Essex, Department of Economics.
  5. Richard R. Nelson & Sidney G. Winter, 2002. "Evolutionary Theorizing in Economics," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 23-46, Spring.
  6. Matthew Rabin., 1997. "Psychology and Economics," Economics Working Papers 97-251, University of California at Berkeley.
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  8. John Foster, 2005. "From simplistic to complex systems in economics," Cambridge Journal of Economics, Oxford University Press, vol. 29(6), pages 873-892, November.
  9. Peter Earl & Tim Wakeley, 2010. "Alternative perspectives on connections in economic systems," Journal of Evolutionary Economics, Springer, vol. 20(2), pages 163-183, April.
  10. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
  11. Frank Schweitzer & Giorgio Fagiolo & Didier Sornette & Fernando Vega-Redondo & Douglas R. White, . "Economic Networks: What do we know and what do we need to know?," Working Papers CCSS-09-010, ETH Zurich, Chair of Systems Design.
  12. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  13. Stuart McDonald & Mohamad Alghamdi & Bernard Pailthorpe, 2012. "The Emergence of a Small World in a Network of Research Joint Ventures," Discussion Papers Series 469, School of Economics, University of Queensland, Australia.
  14. Corso, G. & Lucena, L.S. & Thomé, Z.D., 2003. "The small-world of economy: a speculative proposal," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 430-436.
  15. Mary Gregory & Miriam Beblo & Wiemer Salverda & Ioannis Theodossiou, 2009. "Introduction," Oxford Economic Papers, Oxford University Press, vol. 61(suppl_1), pages i1-i10, April.
  16. Earl, P.E., 1990. "Economics And Psychology: A Survey," Papers 1990-04, Tasmania - Department of Economics.
  17. Oliver E. Williamson, 2002. "The Theory of the Firm as Governance Structure: From Choice to Contract," Journal of Economic Perspectives, American Economic Association, vol. 16(3), pages 171-195, Summer.
  18. repec:cup:cbooks:9780521621991 is not listed on IDEAS
  19. Jeong-Yoo Kim & Hang-Hyun Jo, 2010. "A signalling explanation for preferential attachment in the evolution of social networks," Journal of Evolutionary Economics, Springer, vol. 20(3), pages 375-393, June.
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