Emergent inequality and business cycles in a simple behavioral macroeconomic model

Standard macroeconomic models assume that households are rational in the sense that they are perfect utility maximizers and explain economic dynamics in terms of shocks that drive the economy away from the steady state. Here we build on a standard macroeconomic model in which a single rational representative household makes a savings decision of how much to consume or invest. In our model, households are myopic boundedly rational heterogeneous agents embedded in a social network. From time to time each household updates its savings rate by copying the savings rate of its neighbor with the highest consumption. If the updating time is short, the economy is stuck in a poverty trap, but for longer updating times economic output approaches its optimal value, and we observe a critical transition to an economy with irregular endogenous oscillations in economic output, resembling a business cycle. In this regime households divide into two groups: poor households with low savings rates and rich households with high savings rates. Thus, inequality and economic dynamics both occur spontaneously as a consequence of imperfect household decision-making. Adding a few “rational” agents with a fixed savings rate equal to the long-term optimum allows us to match business cycle timescales. Our work here supports an alternative program of research that substitutes utility maximization for behaviorally grounded decision-making.

Accounting for Wealth-Inequality Dynamics: Methods, Estimates, and Simulations for France

Measuring and understanding the evolution of wealth inequality is a key challenge for researchers, policy makers, and the general public. This paper breaks new ground on this topic by presenting a new method to estimate and study wealth inequality. This method combines fiscal data with household surveys and national accounts in order to provide annual wealth distribution series, with detailed breakdowns by percentiles, age, and assets. Using the case of France as an illustration, we show that the resulting series can be used to better analyze the evolution and the determinants of wealth-inequality dynamics over the 1970–2014 period. We show that the decline in wealth inequality ends in the early 1980s, marking the beginning of a rise in the top 1% wealth share, though with significant fluctuations due largely to asset price movements. Rising inequality in savings rates coupled with highly stratified rates of returns has led to rising wealth concentration in spite of the opposing effect of house price increases. We develop a simple simulation model highlighting how changes in the combination of unequal savings rates, rates of return, and labor earnings that occurred in the early 1980s generated large multiplicative effects that led to radically different steady-state levels of wealth inequality. Taking advantage of the joint distribution of income and wealth, we show that top wealth holders are almost exclusively top capital earners, and increasingly fewer are made up of top labor earners; it has become increasingly difficult in recent decades to access top wealth groups with one's labor income only.

Prize-linked savings accounts: combining virtue and vice to make savings more enticing

Purpose The purpose of this paper is to investigate whether moral licensing – that is, doing something morally dubious after doing the “right” thing – influences the attractiveness of an existing virtue–vice bundle. Design/methodology/approach A prize-linked savings (PLS) account that combines a savings (certificate of deposit) and a probabilistic component (lottery) was examined. In two online experiments, the level of moral license offered by the PLS was manipulated through what institution offered the PLS or a lottery alternative. Findings When the source of the PLS account was more moral (Study 1) or the source of the lottery was less moral (Study 2), the interest in the PLS increased. Research limitations/implications Moral licensing plays a role in making virtue–vice bundles appealing and supports that the need for moral license can be used to increase interest in more morally acceptable behaviour. However, manipulating moral license in the field is complex and requires further research. Practical implications Practitioners may increase PLS savings rates via messaging that emphasises how the saving aspect offers the customer the license to indulge in the gamble; similar to how McDonald’s sold the idea of indulging in fast food with “You deserve a break today”. Originality/value This paper shows that the attractiveness of the PLS virtue–vice bundle is sensitive to the moral acceptability of the components, suggesting their ability to offer the consumer moral license to engage in a socially sanctioned action is part of their appeal. Also, demonstrating that the desire for moral license can be used to encourage positive behaviour.

The Effect of Armed Conflict on Savings Rates: International Evidence from 1980 to 2015

Economic growth theory highlights the importance of saving rates to explain the long-run economic performance of economies. While economic theory has provided an analytical and empirical framework to understand the determinants of saving rates, one of the limitations is that it excludes from the analysis the potential effects of armed conflict and political instability, although it has been demonstrated that such situations can affect intertemporal preferences in terms of consumption and saving. Using a sample of 55 countries with/without conflict from 1980 to 2015, we analyze whether aggregate savings rates are negatively correlated with the existence, intensity, and duration of an armed conflict. The results indicate that countries that have suffered some type of conflict exhibit a saving rate 2.7% lower on average than the rate exhibited by countries that have not suffered such conflict. Additionally, if there is a high-intensity conflict, the saving rates decreases 2.5% more relative to countries that experience low-intensity conflict. Finally, we found a nonlinear relationship between saving rates and conflict duration, suggesting that the impact of conflict on savings decreases with time. These results extend the literature on the effects of armed conflicts on the long-run economic growth.