Inequality, Technology, and the Social Contract

The distribution of human capital and income lies at the center of a nexus of forces that shape a country's economic, institutional and technological structure. I develop a unified model to analyze these interactions and their growth consequences. First, I identify the key factors that make both European-style "welfare state" and US-style "laissez-faire" social contracts sustainable. I also compare the growth rates of these two politico-economic steady states, which are not Pareto-rankable. Second, I examine how technological evolutions affect the set of redistributive institutions that can be durably sustained, showing how skill-biased technical change may cause the welfare state to unravel. Third, I model the endogenous determination of technology or organizational form that results from firms' tailoring the flexibility of their production processes to the distribution of workers' skills. Fourth, I examine how institutions also shape the course of technology; thus, a world-wide shift in the technology frontier results in different evolutions of production processes and skill premia across countries with different social contracts. Finally, I ask what joint configurations of technology, inequality and redistributive policy are feasible in the long run, when all three are endogenous. I show how the diffusion of technology leads to the "exporting" of inequality across borders; and how this, in turn, generates spillovers between social contracts that make it more difficult for nations to maintain distinct institutions and social structures.