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Economic Inequality Exacerbated by Economic Rents from Exploitative Contracting

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  • Harashima, Taiji

Abstract

According to contract theory, exploitative contracting probably exists widely and on a large scale, and it generates economic rents. In this paper, I show that the origin of these economic rents is heterogeneity in fluid intelligences, and heterogeneity in honesty aggravates the situation. Even without asymmetric information and irrationality, and even if economic agents have no malicious intent and are always honest, economic rents from mistakes in business deals are generated. Some households or family lines persistently obtain these economic rents with higher probability than others, and, as a result, extreme economic inequality will be generated. This means that there is a built-in mechanism such that the level of economic inequality in an economy is naturally exacerbated. Hence, a government has to intervene in economic activities to eliminate the negative effects of these economic rents by appropriately redistributing incomes among households.

Suggested Citation

  • Harashima, Taiji, 2020. "Economic Inequality Exacerbated by Economic Rents from Exploitative Contracting," MPRA Paper 104178, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:104178
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    References listed on IDEAS

    as
    1. Botond Köszegi, 2014. "Behavioral Contract Theory," Journal of Economic Literature, American Economic Association, vol. 52(4), pages 1075-1118, December.
    2. David Laibson & Xavier Gabaix, 2004. "Competition and Consumer Confusion," Econometric Society 2004 North American Summer Meetings 663, Econometric Society.
    3. Robert A. Becker, 1980. "On the Long-Run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 95(2), pages 375-382.
    4. Stefano DellaVigna & Ulrike Malmendier, 2004. "Contract Design and Self-Control: Theory and Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(2), pages 353-402.
    5. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters, in: Victor J. Tremblay & Elizabeth Schroeder & Carol Horton Tremblay (ed.), Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74, Edward Elgar Publishing.
    6. Harashima, Taiji, 2010. "Sustainable Heterogeneity: Inequality, Growth, and Social Welfare in a Heterogeneous Population," MPRA Paper 22521, University Library of Munich, Germany.
    7. Taiji HARASHIMA, 2014. "Sustainable Heterogeneity In Exogenous Growth Models. The Socially Optimal Distribution By Government’S Intervention," Theoretical and Practical Research in the Economic Fields, ASERS Publishing, vol. 5(1), pages 73-100.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Contract; Economic rents; Exploitative contracting; Fluid intelligence; Inequality;
    All these keywords.

    JEL classification:

    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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