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Social externalities, overlap and the poverty trap

Abstract

Previous studies find that some social groups are stuck in poverty traps because of network effects. However, these studies do not carefully analyze how these groups overcome low human capital investment activities. Unlike previous studies, the model in this paper includes network externalities in both the human capital investment stage and the subsequent career stages. This implies that not only the current network quality, but also the expectations about future network quality affect the current investment decision. Consequently, the coordinated expectation among the group members can play a crucial role in the determination of the final state. We define “overlap” for some initial skill ranges, whereby the economic performance of a group can be improved simply by increasing expectations of a brighter future. We also define “poverty trap” for some ranges, wherein a disadvantaged group is constrained by its history, and we explore the egalitarian policies to mobilize the group out of the trap.

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Correspondence to Young-Chul Kim.

Additional information

We are indebted to Rajiv Sethi, Oded Galor, Kenneth Chay and two anonymous referees for valuable comments and suggestions for improvement. We benefited greatly from discussions with Matthew Jackson, Andrew Foster and Yeon-Koo Che, and from the comments of seminar participants at Brown University, the University of London (Queen Mary), Korea University, Yonsei University, Sogang University and others. This research was supported by a 2013 Research Grant from Sangmyung University. All remaining errors are ours.

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Kim, YC., Loury, G.C. Social externalities, overlap and the poverty trap. J Econ Inequal 12, 535–554 (2014). https://doi.org/10.1007/s10888-013-9268-1

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Keywords

  • Group inequality
  • Network externality
  • Overlap
  • Poverty trap

JEL Classification

  • I30
  • J15
  • Z13