On the Mechanisms of Inequality∗

Recent research on inequality, in particular as put forward by Brock and Durlauf (2000 a,b) and Durlauf (1999 a,b, 2000), has di-rected our attention to the fact that the composition and behavior of groups of which a person is a member plays an important role for socioeconomic outcomes. Heterogeneity across groups and group-level effects can either lead to take-offs of individuals or substantial immo-bility, social lock-in phenomena concerning learning, building up of skills and formation of human capital, and differences in income and status across generations. In the present paper we explore some ma-jor mechanism that can lead educational and social lock-ins. Those mechanisms can give rise to persistent inequality. The presence of such mechanisms has important implications for how competition in mar-ket economies work and how aggregate inequality is created. If those mechanisms are present the models become highly nonlinear and may give rise to thresholds and poverty traps. The capability of the indi-vidual to successfully compete is achieved only after some thresholds are passed, since there are often multiple steady state equilibria and there is path dependency as to the outcome of the dynamics. ∗We want to thank Buz Brock and Steven Durlauf for helpful discussions and Lars Gruene for setting up the numerical program to undertake the numerical simulations