In 1974 an article appeared in Science magazine with the dry-sounding title “Judgment Under Uncertainty: Heuristics and Biases” by a pair of psychologists who were not well known outside their discipline of decision theory. In it Amos Tversky and Daniel Kahneman introduced the world to Prospect Theory, which mapped out how humans actually behave when faced with decisions about gains and losses, in contrast to how economists assumed that people behave. Prospect Theory turned Economics on its head by demonstrating through a series of ingenious experiments that people are much more concerned with losses than they are with gains, and that framing a choice from one perspective or the other will result in decisions that are exactly the opposite of each other, even if the outcomes are monetarily the same. Prospect Theory led cognitive psychology in a new direction that began to uncover other human biases in thinking that are probably not learned but are part of our brain’s wiring.

Thinking fast and slow.

We investigate whether income inequality affects subsequent growth in a cross-country sample for 1965-90, using the models of Barro (1997), Bleaney and Nishiyama (2002) and Sachs and Warner (1997), with negative results. We then investigate the evolution of income inequality over the same period and its correlation with growth. The dominating feature is inequality convergence across countries. This convergence has been significantly faster amongst developed countries. Growth does not appear to influence the evolution of inequality over time. Outline

https://www.econstor.eu/bitstream/10419/81822/1/02-28.pdf

Economic growth and income inequality

https://www.econ.uzh.ch/dam/jcr:ffffffff-9758-127f-0000-00004797af07/iewwp106.pdf

Third Party Punishment and Social Norms

The Theory of Monopolistic Competition.

People behave pro-socially in a wide variety of situations that standard economic theory is unable to explain. Social comparison is one explanation for such pro-social behavior: people contribute if others contribute or cooperate as well. This paper tests social comparison in a field experiment at the University of Zurich. Each semester every single student has to decide whether he or she wants to contribute to two Social Funds. We provided 2500 randomly selected students with information about the average behavior of the student population. Some received the information that a high percentage of the student population contributed, while others received the information that a relatively low percentage contributed. The results show that people behave pro-socially, conditional on others. The more others cooperate, the more one is inclined to do so as well. The type of person is important. We are able to fix the i?½typesi?½ by looking at revealed past behavior. Some persons seem to care more about the pro-social behavior of others, while other i?½typesi?½ are not affected by the average behavior of the reference group.

/pdf/social-comparisons-and-pro-social-behavior-testing-1vdsniq72v.pdf

Social Comparisons and Pro-social Behavior: Testing "Conditional Cooperation" in a Field Experiment

https://www.zora.uzh.ch/id/eprint/8554/2/2008_FoellmiZweim%C3%BCller_structural_change_engel_kaldorV.pdf

Structural change, Engel's consumption cycles and Kaldor's facts of economic growth

This book looks at the distribution of income and wealth and the effects that this has on the macroeconomy, and vice versa. Is a more equal distribution of income beneficial or harmful for macroeconomic growth, and how does the distribution of wealth evolve in a market economy? Taking stock of results and methods developed in the context of the 1990s revival of growth theory, the authors focus on capital accumulation and long-run growth. They show how rigorous, optimization-based technical tools can be applied, beyond the representative-agent framework of analysis, to account for realistic market imperfections and for political-economic interactions. The treatment is thorough, yet accessible to students and nonspecialist economists, and it offers specialist readers a wide-ranging and innovative treatment of an increasingly important research field. The book follows a single analytical thread through a series of different growth models, allowing readers to appreciate their structure and crucial assumptions. This is particularly useful at a time when the literature on income distribution and growth has developed quickly and in several different directions, becoming difficult to overview.

/pdf/income-distribution-in-macroeconomic-models-3sbpoat6ey.pdf

Income distribution in macroeconomic models

We utilize Schmookler's (1966) concept of demand-induced invention to study the role of income inequality in an endogenous growth model. As rich consumers can satisfy more wants than poor consumers, both prices and market sizes for new products, as well as their evolution over time, are determined by the income distribution. We show how a change in the distribution of income affects the incentive to innovate and hence long-run growth. In general, less inequality tends to discourage the incentive to innovate, but this depends on the nature of the redistribution.

/pdf/income-distribution-and-demand-induced-innovations-23y1aut8mu.pdf

Income Distribution and Demand-Induced Innovations

We introduce non-homothetic preferences into an innovation-based growth model and study how income and wealth inequality affect economic growth. We identify a (positive) price effect--where increasing inequality allows innovators to charge higher prices and (negative) market-size effects--with higher inequality implying smaller markets for new goods and/or a slower transition of new goods into mass markets. It turns out that price effects dominate market-size effects. We also show that a redistribution from the poor to the rich may be Pareto improving for low levels of inequality.

/pdf/income-distribution-and-demand-induced-innovations-1wyaphwaoq.pdf

Reto Foellmi

Papers

Structural change, Engel's consumption cycles and Kaldor's facts of economic growth

Income distribution in macroeconomic models

Income Distribution and Demand-Induced Innovations

Income Distribution and Demand-Induced Innovations

Who gains from Non-Collusive Corruption?