Inequality: An Explanation Using State-Utility and Information Asymmetry

Abstract

Having a formal understanding of what various institutions represent should be important. There are few economic variables which can accumulate over time (and give us what i call as "state utility"). All these institutions, like education, health, social (like caste system, dowry etc.), do is change the way these state variables evolve. Government affects these institutions by investing in them which changes the rate of evolvement (via advances in technology or infrastructure or formal laws etc) There are no "good" or "bad" institutions. There are institutions which are "in-line" with the people's preferences and there are the ones who are "mismatch" with what people want. As economist, we may think that since caste system etc. are not beneficial in "monetary" terms, they are bad for growth. But comments like "i PREFER being hungry than borrow money from some lower caste person (to start new business)" should make us realize that these institutions are not like some mysterious forces. They represent the aggregate level mechanism by which people let their preferences known and how these preferences evolve. We should not force the kind of development (i.e. kind of institutions), we (policy makers) want them to have. May be that is not what people want. Hence, having a formal understanding of these institutions and the mechanisms through which government can know about these "preferred" institutions becomes important.

JEL Classification: D63, D02, D82, Z13