Income inequality is important both as a source and the result of economic growth, yet the process that generates income inequality, especially in market economies, is poorly understood. This research studies the evolution of economic inequality in market economies, its impact on long-term development prospects, and the role of public policy in this regard. The issues to be investigated include the following: Are markets inherently equalizing? Can historical inequality account for divergent paths of development across countries? Can psychological features, such as peer effects and aspirations play a role in explaining inequality between races, castes or regions? How do these factors interact with capital market imperfections? What role does globalization or financial development play in the evolution of inequality within and across countries? What is the role of redistributive fiscal policy, regulations concerning child labor or financial markets in fostering capital accumulation and lowering inequality? The research will build a unified theory that incorporates the co-existence of educational and financial bequests in a dynamic model of competitive equilibrium to explain income inequality. The theory will be extended to analyze the long run implications of globalization and redistributive policies on income inequality.
The scientific merit of this research lies in the ability of the theory to explain the persistence of inequality at the macroeconomic and microeconomic levels in market economies. The broader impact of this research is that the analytical framework developed can be used by a wide variety of researchers in different fields of economics to develop predictions concerning the long term effects of changes in technology, market regulations or interventionist policies on income inequality. The other broad impact is that it will feed into a textbook, which can be a useful teaching guide in courses on inequality, institutions and development at either the advanced undergraduate or graduate level. Finally, this research will foster collaboration between two American universities and a German university as well as contribute to graduate education by employing graduate students as research assistants
