Creative Capital Production, Inefficiency, and Inequality: A Theoretical Analysis

RIT Economics Department Working Paper No. 16-8

19 Pages Posted: 19 Jul 2016

See all articles by Amitrajeet A. Batabyal

Amitrajeet A. Batabyal

Rochester Institute of Technology

Peter Nijkamp

VU University of Amsterdam - Department of Spatial Economics; Tinbergen Institute

Date Written: July 18, 2016

Abstract

We analyze inefficiency and inequality associated with the use of creative capital to produce a final good. We first study a case in which the creative capital units are perfect substitutes in the production of the final good. We show that the equilibrium outcome is inefficient and that there is too little application of effort. Second, we define an indicator of inequality and show that an increase in inequality enhances efficiency and that it is possible to achieve complete efficiency. Third, we focus on the case where the individual creative capital units are perfect complements and show that the equilibrium outcome is inefficient with too little effort application. Finally, we contend that our theoretical results provide a possible rationale for the observed income inequality in cities and regions in which the activities of the creative class constitute a large part of all economic activities.

Keywords: Creative Capital, Inefficiency, Inequality, Perfect Complements, Perfect Substitutes

JEL Classification: R11, D20, D63

Suggested Citation

Batabyal, Amitrajeet A. and Nijkamp, Peter, Creative Capital Production, Inefficiency, and Inequality: A Theoretical Analysis (July 18, 2016). RIT Economics Department Working Paper No. 16-8, Available at SSRN: https://ssrn.com/abstract=2811298 or http://dx.doi.org/10.2139/ssrn.2811298

Amitrajeet A. Batabyal (Contact Author)

Rochester Institute of Technology ( email )

Department of Economics, RIT
92 Lomb Memorial Drive
Rochester, NY NEW YORK 14623-5604
United States
5853134063 (Phone)
5854755777 (Fax)

HOME PAGE: http://people.rit.edu/aabgsh

Peter Nijkamp

VU University of Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
1081HV Amsterdam
Netherlands
+31 20 4446091 (Phone)
+31 20 4445611 (Fax)

Tinbergen Institute

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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