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Economic Inequality and Heterogeneous Success Rates of Investment

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  • Harashima, Taiji

Abstract

Some investments succeed and others fail. Furthermore, the probability of success will differ among people who undertake investments. In this paper, we construct exogenous and endogenous growth models that show that this heterogeneity in success rates of investment can cause extreme economic inequality. A major implication of our models is that even if the success rates are only slightly heterogeneous, people with relatively higher success rates can accumulate a larger amount of capital than those with relatively lower success rates, and as a result, the latter cannot satisfy all of their optimality conditions leading to extremely high debt-to-consumption ratios and large indebtedness to the former group. I then modify the models to consider multilateral behavior and the necessity of government intervention to improve this situation by means of simultaneous heterogeneity. I find that to prevent such extreme economic inequality, it is indispensable for the government to intervene appropriately by transferring appropriate amounts of income from the former to the latter.

Suggested Citation

  • Harashima, Taiji, 2021. "Economic Inequality and Heterogeneous Success Rates of Investment," MPRA Paper 110688, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:110688
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    References listed on IDEAS

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    1. 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.
    2. Everett, Jim & Watson, John, 1998. "Small Business Failure and External Risk Factors," Small Business Economics, Springer, vol. 11(4), pages 371-390, December.
    3. 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.
    4. Jo-Hui Chen & Martin Williams, 1999. "The determinants of business failures in the US low-technology and high-technology industries," Applied Economics, Taylor & Francis Journals, vol. 31(12), pages 1551-1563.
    5. Harashima, Taiji, 2010. "Sustainable Heterogeneity: Inequality, Growth, and Social Welfare in a Heterogeneous Population," MPRA Paper 22521, University Library of Munich, Germany.
    6. Shaike Marom & Robert N. Lussier, 2014. "A Business Success Versus Failure Prediction Model for Small Businesses in Israel," Business and Economic Research, Macrothink Institute, vol. 4(2), pages 63-81, December.
    7. Harashima, Taiji, 2021. "Consequence of Heterogeneous Economic Rents under the MDC-based Procedure," MPRA Paper 105765, University Library of Munich, Germany.
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    Cited by:

    1. Harashima, Taiji, 2020. "A Theory of the Credit-to-GDP Gap: Using Credit Gaps to Predict Financial Crises," MPRA Paper 111732, University Library of Munich, Germany.

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    More about this item

    Keywords

    Economic inequality; Success rate of investment; Heterogeneous ability;
    All these keywords.

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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