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Birds of a Feather: Life Cycle Social Externalities, Heterogeneous Beliefs, and Development Bias

Author

Listed:
  • Young-Chul Kim

    (Department of Economics, Sogang University, Korea)

  • Glenn C. Loury

    (Department of Economics, Brown University, USA)

Abstract

This study models how social networks that span an individual’s entire life cycle affect human capital acquisition and subsequent employment outcomes. Early-life social affiliations can affect the cost of human capital, while later-life connections can affect the earnings derived from previously acquired human capital. The dynamic interactions between early-life network-mediated investments and later-life networkmediated returns give rise to multiple, fully consistent, rational expectations equilibria. These self-fulling expectations imply development bias, wherein heterogeneous beliefs about the future persistently generate unequal outcomes among social groups. When the model is applied to a country’s development cycle, the theoretical findings suggest that, while between-group inequality can reduce economic growth in a mature economy, it may increase growth in an economy in the initial stages of its development. Relevant historical examples of between-group dynamics are discussed extensively.

Suggested Citation

  • Young-Chul Kim & Glenn C. Loury, 2021. "Birds of a Feather: Life Cycle Social Externalities, Heterogeneous Beliefs, and Development Bias," Working Papers 2104, Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy).
    • Handle: RePEc:sgo:wpaper:2104
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    More about this item

    Keywords

    Group Inequality; Social Externality; Development Bias; Expectation Trap;
    All these keywords.

    JEL classification:

    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General
    • J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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