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The Memberships Theory of Inequality: Ideas and Implications

  • Steven N. Durlauf

The last decade has seen a resurgence of interest in issues of inequality by the economics profession. The sources of this increased interest are straightforward to discern. First, both increasing cross-section wage inequality as well as the apparent intractability of inner city poverty have placed inequality-related issues at the forefront of public policy debates. Second, advances in economic theory have provided new ways to formally analyse the properties of heterogeneous populations of economic actors and in turn have allowed many aspects of inequality to be rigorously modelled. In this paper, I argue that a wide range of recent empirical and theoretical advances within economics, taken together, represent a new perspective on the nature of inequality. To be clear, the emergence of this new paradigm does not imply that more traditional explanations of inequality are invalid; rather, it means that these older explanations may be usefully supplemented. What are the key features of this perspective? The memberships theory of inequality is based on three general propositions. 1. Individual preferences, beliefs, and opportunities are strongly influenced by one's memberships in various groups. Such groups may be fixed, such as race, or may be determined by the economy or society, such as neighborhoods, schools, or firms. 2. Positive interaction effects occur between members of a given group, so that group level influences generate common outcomes among group members. 3. Greater societal stratification by income, race, education, or language leads to divergence in group characteristics which results in greater cross-section inequality and decreased social mobility. This new perspective emphasizes the role of influences on individual outcomes of an array of groups whose memberships are themselves determined endogenously in the economy/society. Taken as a whole, this new perspective may be referred to as the {\it memberships theory of inequality}. In contrast to the memberships theory of inequality, previous models of the evolution of the income distribution (circa 1980) emphasized individual characteristics with at most little attention to group memberships. For example, the human capital model still best exposited in Gary Becker 1975 typically emphasized the connection between individual productive ability and wages; similarly, models of intergenerational mobility such as those of Becker and Nigel Tomes (1979) or Glenn Loury (1981), typically focused on within-family effects of human capital investment, so that the income histories of family dynasties evolved independently of one another. In what sense is the memberships theory distinguished from the more traditional formulations of the human capital perspective? The key difference lies in the level of aggregation at which one describes the influences on an individual which affect his life prospects. To be clear, the memberships approach does not mean that the atomistic human capital approach is not important. Indeed, as seen in work such as that of Roland B\'enabou (1993,1996), both perspectives can be integrated in interesting (and elegant) ways.

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Paper provided by Santa Fe Institute in its series Research in Economics with number 97-05-047e.

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Date of creation: May 1997
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Handle: RePEc:wop:safire:97-05-047e
Contact details of provider: Postal: 1399 Hyde Park Road, Santa Fe, New Mexico 87501
Web page: http://www.santafe.edu/sfi/publications/working-papers.html

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  1. William A. Brock & Steven N. Durlauf, 1995. "Discrete Choice with Social Interactions I: Theory," Working Papers 95-10-084, Santa Fe Institute.
  2. Gary S. Becker & Nigel Tomes, 1994. "Human Capital and the Rise and Fall of Families," NBER Chapters, in: Human Capital: A Theoretical and Empirical Analysis with Special Reference to Education (3rd Edition), pages 257-298 National Bureau of Economic Research, Inc.
  3. Henderson, Vernon & Mieszkowski, Peter & Sauvageau, Yvon, 1978. "Peer group effects and educational production functions," Journal of Public Economics, Elsevier, vol. 10(1), pages 97-106, August.
  4. Roland Benabou, 1991. "Workings of a City: Location, Education, and Production," NBER Technical Working Papers 0113, National Bureau of Economic Research, Inc.
  5. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
  6. Gary S. Becker, 1974. "A Theory of Marriage: Part II," NBER Chapters, in: Marriage, Family, Human Capital, and Fertility, pages 11-26 National Bureau of Economic Research, Inc.
  7. Streufert, Peter, 2000. " The Effect of Underclass Social Isolation on Schooling Choice," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(4), pages 461-82.
  8. Benabou, Roland, 1996. "Equity and Efficiency in Human Capital Investment: The Local Connection," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 237-64, April.
  9. Blume Lawrence E., 1993. "The Statistical Mechanics of Strategic Interaction," Games and Economic Behavior, Elsevier, vol. 5(3), pages 387-424, July.
  10. W. A. Brock, 1993. "Pathways to Randomness in the Economy: Emergent Nonlinearity and Chaos in Economics and Finance," Working Papers 93-02-006, Santa Fe Institute.
  11. Bernard, Andrew B. & Durlauf, Steven N., 1996. "Interpreting tests of the convergence hypothesis," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 161-173.
  12. Glenn C. Loury, 1976. "A Dynamic Theory of Racial Income Differences," Discussion Papers 225, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Edward E. Glaeser & Bruce Sacerdote & Jose A. Scheinkman, 1995. "Crime and Social Interactions," Harvard Institute of Economic Research Working Papers 1738, Harvard - Institute of Economic Research.
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  15. Azariadis, Costas & Drazen, Allan, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 501-26, May.
  16. George J. Borjas, 1994. "Ethnicity, Neighborhoods, and Human Capital Externalities," NBER Working Papers 4912, National Bureau of Economic Research, Inc.
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  26. James Heckman & Anne Layne-Farrar & Petra Todd, 1995. "Does Measured School Quality Really Matter? An Examination of the Earnings-Quality Relationship," NBER Working Papers 5274, National Bureau of Economic Research, Inc.
  27. Fernandez, Raquel & Rogerson, Richard, 1996. "Income Distribution, Communities, and the Quality of Public Education," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 135-64, February.
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