Social Externalities, Overlap and the Poverty Trap

32 Pages Posted: 1 Apr 2014 Last revised: 1 Sep 2014

See all articles by Young-Chul Kim

Young-Chul Kim

Sangmyung University

Glenn C. Loury

Brown University - Department of Economics; Brown University - Watson Institute for International and Public Affairs

Date Written: November 24, 2013

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.

Keywords: Group Inequality, Network Externality, Overlap, Poverty Trap

JEL Classification: I30, J15, Z13

Suggested Citation

Kim, Young-Chul and Loury, Glenn C., Social Externalities, Overlap and the Poverty Trap (November 24, 2013). Watson Institute for International Studies Research Paper No. 2014-12. Available at SSRN: https://ssrn.com/abstract=2418898 or http://dx.doi.org/10.2139/ssrn.2418898

Young-Chul Kim (Contact Author)

Sangmyung University ( email )

7 Hongjidong, Jongro-ku
Seoul, 110-743

HOME PAGE: http://sites.google.com/site/youngchulkimhomepage/

Glenn C. Loury

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States

Brown University - Watson Institute for International and Public Affairs ( email )

111 Thayer Street
Box 1970
Providence, RI 02912-1970
United States

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