Research & Work in Progress

Work in Progress:

On Poverty Traps, Rational Bubbles, and Wealth Inequality (with Accinelli E., and L. Policardo)

AbstractThis paper develops a dynamic general equilibrium (DGE) model with heterogeneous agents to connect three macroeconomic phenomena: persistent poverty traps, sluggish real growth, and rising wealth inequality. The model achieves this by allowing agents, who differ in patience and face a subsistence consumption constraint, to choose between portfolios consisting of productive capital and a fixed-supply, unproductive asset susceptible to rational speculative bubbles. The analysis reveals that these bubbles, while rational, generate a negative wealth effect that crowds out productive investment, leading to lower real wages and output, which in turn exacerbates wealth inequality by pushing constrained agents closer to the poverty trap. Simulations calibrated to different income groups suggest that middle-income economies are particularly vulnerable to a bubble-induced collapse into the low-income equilibrium.. Calibration and simulation illustrate the path dependence and the potentially severe impact of bubbles, especially in parameterizations mimicking economies according to income groups.Keywords: Poverty Traps, Wealth Inequality, Speculative Bubbles, Endogenous Savings, Portfolio Choice, Heterogeneous Agents, General Equilibrium, Subsistence Consumption.

The Gilded Cage: The effects of Social Segregation and Wealth Inequality on Capital Accumulation (with Policardo, L.)

AbstractWe propose a new theory to explain the ambiguous empirical relationship between inequality and economic growth, arguing that its sign is determined by the interaction between wealth concentration and social structure. We develop a general equilibrium model where households make a portfolio choice between productive capital and non-productive "luxury" assets, which confer social status. In a significant departure from standard models, we posit that the desire for status-signaling is not constant. For the wealthy, this desire is intensified by social integration, where they feel compelled to distinguish themselves from other groups. High social segregation, conversely, creates a ``gilded cage'' where the status of the elite is secure, reducing the need for conspicuous consumption. We formalize this mechanism by making the preference for status endogenous to the degree of segregation. Calibrating the model to the United States (high inequality, high segregation) and France (high inequality, low segregation), our simulations generate a provocative result: the high-segregation economy accumulates a larger stock of productive capital and achieves higher long-run output. This occurs because segregation insulates the wealthy—who control the majority of investment capital—from the pressure to engage in wasteful status competition. Consequently, we find that wealth redistribution in a highly segregated society can be detrimental to growth by transferring capital from the highly productive-investing elite to other groups. Our paper provides a novel, theoretically coherent mechanism where social stratification, paradoxically, can be growth-enhancing.Keywords: Economic Growth, Wealth Inequality, Conspicuous Consumption, Segregation, Status Economics.

Optimal Timing and Enforcement to Annihilate Firms' Pollution (with Accinelli E., and S. Ille)

AbstractIn contrast to conventional approaches that perceive environmental degradation as a passive externality, we construct a model that intrinsically links pollution to a firm’s investment decisions. We aim to analyze the behavior of polluting firms under regulatory policies, i.e., exploring the timing of pollution reduction and the effectiveness of audits in curbing environmental damage. Given that pollution persists until environmental damage becomes a binding constraint on further productive capacity, we incorporate the natural, self-limiting mechanism in our model that has received limited attention in the literature. We study the role of the discount factor, which determines the trade-off between short-term profit maximization and long-term sustainability. Consequently, varying degrees of patience and myopia influence a firm’s pollution trajectory. By simulating interactions between auditors and firms, we transcend conventional Pigouvian prescriptions and provide a more comprehensive account of the implementation constraints. Based on our proposed dynamic model, we develop a dynamic game to show the conditions under which random inspections by auditors prevent firms from polluting, even when the former are corrupt and susceptible to bribery. This allows us to design transparent and effective compliance mechanisms, even in the face of corruption risk. Our findings offer practical insights for regulatory design in imperfect institutional settings.Keywords: Corruption; Discount factor; Dynamic constraints; Enforcement policy; Environmental regulation; Strategic auditing.

Riddles and waves of economic growth and wealth concentration driven by non-productive assets (with Grassetti, F.)

AbstractThis paper presents a non-linear dynamic macroeconomic model to analyze the interactions between economic growth and wealth concentration driven by both productive capital and non-productive capital assets. In summary, we show that: i) Equilibrium occurs only if the return on the non-productive asset is negative. In such a case, if saving for productive capital is low, then there are fluctuations and riddles; however, developing economies always converge towards equilibrium, while developed economies may or may not converge but do not fluctuate, and underdeveloped economies may converge or not converge, but they also present fluctuations when savings allocated to productive capital are too high. ii) If the return on non-productive assets is positive (most probable case), then if the savings allocated to productive capital are low, the (developed, developing, and underdeveloped) economies always converge towards a poverty trap. We further show that if capitalists invest in non-productive assets, strong inequalities exist in all economies, but these inequalities are even greater in developing economies. Inequality is reduced only when the share invested in the non-productive asset is very close to zero, but if a little (even 0.2) is invested in this type of asset, then the inequality between workers and capitalists is immediately very large.Keywords: Behavioral macroeconomics, Economic Growth, Poverty Traps’ Stability.

The hierarchical evolutionary game: Economic growth vs Traps (with Gubar, A., Gerschuk, T., and Owen, L. )

AbstractWe propose an evolutionary hierarchical game model applied to behavioral macroeconomics. Our model proposal considers two levels of hierarchy, a first-level hierarchy made up of lead-level hierarchy ers that we call Children. We affirm that as a second-level hierarchy, the player made up in their own terms of the second level (Children) access ``thresholds or signals'' to make decisions in their game. Thus, we show the imitative and dynamic evolution of a structural economy in hierarchies that can converge towards one state or another characterized by high- or low-profile economic agents or a mixture of these. Hence, the course of the economy towards stationary states of economic growth, or the opposite, or mixtures. The economy dynamically evolve towards stationary states of high levels of economic performance, with high-profile actors (educated, trained, investors, collaborators, benefactors, foreign preferences, etc.) or, on the contrary, develop a lutionarily stable economy characterized by poor economic performance made up of low-skilled players, low levels of investment, and generally known as the steady state of the poverty trap. We show the threshold values and the cases of bifurcations to overcome one equilibrium or another, and thus make the economy converge to the desirable stationary state.

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