Boris Gershman

The two sides of envy, destructive and constructive, give rise to qualitatively different equilibria, depending on the economic, institutional, and cultural environment. If investment opportunities are scarce, inequality is high, property rights are poorly protected, and social comparisons are strong, society is likely to be in the "fear equilibrium," in which better endowed agents restrain their efforts to prevent destructive envy of the relatively poor. Otherwise, the standard "keeping up with the Joneses" competition arises, and envy is satisfied through suboptimally high efforts. Economic growth expands the production possibilities frontier and triggers an endogenous transition from one equilibrium to the other causing a qualitative shift in the relationship between envy and economic performance: envy-avoidance behavior with its adverse effect on investment paves the way to creative emulation. From a welfare perspective, better institutions and wealth redistribution that move the society away from the low-output fear equilibrium need not be Pareto improving in the short run, as they unleash the negative consumption externality, but in the long run such policies are likely to increase social welfare due to enhanced productivity growth.

The evil eye belief is a widespread superstition according to which envious people can cause harm by a mere glance at coveted objects or their owners. This paper argues that such belief originated and persisted as a heuristic under conditions in which destructive envy is a real threat and envy-avoidance strategies constitute a rational response to this threat. Historically, rising wealth inequality, a natural by-product of early economic development, might have increased the risk of envy-induced destructive behavior leading to the emergence of the evil eye belief. Evidence from the Standard Cross-Cultural Sample shows that in small-scale preindustrial societies there is indeed a robust positive association between the incidence of the belief and various measures of wealth stratification. Furthermore, the evil eye belief is more likely to be present in agro-pastoral societies which technologically sustain higher levels of inequality and where material wealth plays a major role in the subsistence economy.

We use an agent-based computational approach to show how inflation can worsen macroeconomic performance by disrupting the mechanism of exchange in a decentralized market economy. We find that increasing the trend rate of inflation above 3 percent has a substantial deleterious effect, but lowering it below 3 percent has no significant macroeconomic consequences. Our finding remains qualitatively robust to changes in parameter values and to modifications to our model that partly address the Lucas critique. Finally, we contribute a novel explanation for why cross-country regressions may fail to detect a significant negative effect of trend inflation on output even when such an effect exists in reality.

This paper is an exploratory analysis of the role that banks play in supporting the mechanism of exchange. It considers a model economy in which exchange activities are facilitated and coordinated by a self-organizing network of entrepreneurial trading firms. Collectively, these firms play the part of the Walrasian auctioneer, matching buyers with sellers and helping the economy to approximate equilibrium prices that no individual is able to calculate. Banks affect macroeconomic performance in this economy because their lending activities facilitate entry of trading firms and also influence their exit decisions. Both entry and exit have conflicting effects on performance, and we resort to computational analysis to understand how they are resolved. Our analysis sheds new light on the conflict between micro-prudential bank regulation and macroeconomic stability. Specifically, it draws an important distinction between "normal" performance of the economy and "worst-case" scenarios, and shows that micro prudence conflicts with macro stability only in bad times. The analysis also shows that banks provide a "financial stabilizer" that in some respects can more than counteract the more familiar financial accelerator.

This paper emphasizes the importance of considering the mechanisms that coordinate economic transactions in a decentralized economy, namely the role played by a self-organizing network of entrepreneurial trading firms, for theories aimed at guiding macroeconomic policy. We review a research program that aims to understand how, and how well, trading activities are coordinated in various circumstances by employing agent-based computational (ACE) models of stylized economies where these activities take place in a self-organizing network of markets created and operated by profit-seeking business firms. We discuss how such a research program can yield important policy-relevant insights, beyond those that can be offered by conventional dynamic stochastic general equilibrium (DSGE) models, into several macroeconomic phenomena including the emergence of monetary equilibria in a decentralized economy, the microfoundations of the multiplier process, the costs of a higher trend rate of inflation, and the role of the banking system in economic crises.

This paper examines econometric studies of the relationship between income inequality and economic growth. The Kuznets curve is present in the data but there is an ongoing debate about its shape and relevance in explaining cross-country differences in inequality levels. Empirical works focusing on the impact of income distribution on the rate of economic growth provide ambiguous conclusions which may be caused by the problem of incorrect model specification due to nonlinearity of the relationship, its peculiarities for different groups of countries, and differences in estimation techniques.

This paper represents a theoretical survey of models linking income inequality and economic growth. Both sides of the two-way causal relationship are examined: the impact of economic development on income distribution and the effect of inequality on subsequent growth rate. Existing theories are divided into groups according to underlying economic mechanisms and their relevance at different stages of development.