Factor Intensity Reversal and Ergodic Chaos

This paper studies a two-sector endogenous growth model with labour augmenting externalities or Harrod-Neutral technical change. The technologies are general and the preferences are of the CES class. If con- sumers are su±ciently patient, ergodic chaos and geometric sensitivity to initial conditions can emerge if either (1) there is factor intensity reversal; or (2) if the consumption goods producing sector is always capital intensive. The upper bound on the discount rate is determined only by the transver- sality condition. If utility is linear, there can be chaos only if there is factor intensity reversalErgodic Chaos; Two-sector endogenous growth model; Factor intensity reversal; Labor-augmenting externalities

Rising Wage Inequality: Does the Return to Management Tell the Whole Story?

This paper argues that the increased wage inequality observed in recent years is driven by changes in management compensation. The analysis is conducted within the framework of a two-sector search model with heterogeneous employees and heterogenous jobs i.e. employees with different educational levels who work in either management or the non-management sector of a firm. Individuals employed in the non-management sector search for management jobs while employed. This model characterizes the labor market flows, the firm’s structure and the employee composition as well as the wage distribution in the firm. Using the personnel records from a large pharmaceutical company, the parameters of the model are estimated. This allows us to conclude that the increased wage inequality observed is due to amplified within and between group wage inequality which is driven by an increased gap between management and non-management wages.wage inequality, two-sector search model, skill-based technological change, personnel data

Management Compensation and Firm-Level Income Inequality

In recent decades, most developed countries have experienced a simultaneous increase in income inequality and management compensation. In this paper, we study the relation between management compensation and firm-level income dynamics in a general equilibrium model. Empirical estimation, of the model’s key parameters show that the rising management premium is indeed the main driving force behind the observed increase in income inequality. This is the case even when other potential sources such as technological progress and skill-biased technological change are taken into account. We also show that a rising management premium produces income distribution dynamics at the firm level which are similar to those observed at the market level, i.e. rising income inequality overall as well as within and between education groups.income inequality, two-sector search model, skill-biased technological change, personnel data

The Long and Winding Road: Social Capital and Commuting

We develop a two-sector model to analyze which kind of social organization generates trust. Social capital is de…ned as trust. We examine two communities: the bedroom community in which people commute long distance to work and the virility community in which people do not commute to work. The hypothesis is that people do not have time to interact spontaneously out- side work in the bedroom community. We show that in the bedroom community social capital cannot accumulate. Hence our results show that time spent in- teracting with your neighbor must be added as an important production factor when considering the formation of social capital in society. Thus, in a commu- nity where agents only interact when producing output, social capital may not accumulate To our knowledge, no such attempt to model social capital has yet been undertaken and this gap or ‘missing link’in economic debates has to be developed to grasp a more holistic understanding of the big di¤erences in the wealth of nations or regionsSocial capital; Two-Sector Model; Indeterminacy

Love Thy Neighbor: Bonding versus Bridging Trust

We study how trust is generated in society. In a two-sector model, we analyze two communities. In the bonding community people do not trust people outside their regular networks. In the bridging community people choose to trust strangers when they meet them. The hypothesis is that when trust is only bonding, it cannot accumulate. Our theoretical contribution is to show that when trust is only bonding then the economy’s level of trust moves to an unstable equilibrium that may under certain conditions ‡uctuate forever. If, however, trust is also bridging, then trust will accumulate. Future research should seek to establish the appropriate institutional framework for establishing the optimal mix between both bonding and bridging social capital in society.Trust; two-sector model; chaos

Social Capital and Market Centralisation: A Two-Sector Model

We develop a two-sector model to analyze which kind of social organization generates social capital. The hypothesis is that social capital must be added as an important production factor when considering decentralization of production. Thus, market centralization processes in a capitalist society eventually may fragmentize and thus destroy social capital if the positive externality of local production and social capital is not taken into account. To our knowledge, no such attempt to model social capital has yet been undertaken and this gap or ‘missing link’ in economic debates has to be developed to grasp a more holistic understanding of the big differences in the wealth of nations or regions. The model shows that if the policy maker decides to centralize the economy, then the economy moves from an potentially stable equilibrium to an unstable one that may under certain condition even fluctuate forever.Social capital; market centralization; two-sector model; economic growth growth

A note on commitment when there are errors in communication

In this note we analyze the viability of a commitment strategy when there are errors in communication. We consider an entry deterrence game where with a certain probability the Incumbent's decision is either perfectly observed by the Potential Intruder or, with complementary probability, nothing is observed. We find that in equilibrium the Incumbent benefits as much from a decision to accommodate entry as a commitment to fight entry being observed with sufficiently high probability by the potential intruder. Indeed, there is an equilibrium where the Incumbent commits to fight entry with probability one even when this action is observed with zero probability.

Social preferences, accountability, and wage bargaining

We experimentally test preferences for employment in a collective wage bargaining situation with heterogeneous workers. We vary the size of the union and introduce a treatment mechanism transforming the voting game into an individual allocation task. Our results show that highly productive workers do not take employment of low productive workers into account when making wage proposals, regardless of whether only union members determine the wage or all workers. The level of pro-social preferences is small in the voting game, but it increases if the game becomes an individual allocation task. We interpret this as an accountability effect

Money or morality:fairness ideals in unstructured bargaining

We augment the Nash bargaining solution by fairness ideals in order to predict the outcomes of unstructured bargaining after the individual production of a joint surplus. If production depends on individual effort, talent, and luck, fairness ideals might be based on the accountability principle. In a lab experiment with real production and unstructured bargaining, we investigate subjects’ fairness ideals, their bargaining behaviour, and the outcomes of the bargaining process. As impartial spectators, about 75% of the subjects hold meritocratic or libertarian fairness ideals. However, these ideals do not affect their bargaining behaviour which is strongly opportunistic. Therefore the fairness-augmented Nash solution with opportunistic fairness ideals predicts the bargaining outcome best