Behavioral Economics: A New Look at Income Inequality and the Growing Wage Gap
9 Pages Posted: 7 Jan 2019
Date Written: December 30, 2018
Abstract
Behavioral economics has been growing as a powerful tool to explain much of our life. Although people are often irrational in making their decisions, they are very predictable. In this paper, we offer an extension of the theory about how the human overvaluation of what they have (the high price of ownership) and the human fear of loss influence their decision-making process. Also, we argue for the U-curve relationship between the amount of money spent and the efforts (measured by time) that people spend before spending the money. Our theory offers new insights into why efficiency wages are prevalent, why income inequality is larger than expected, and why the growing wage gap is inherent in many countries.
Keywords: Behavioral economics, Income inequality, Efficiency wage
JEL Classification: D91.
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