Markus Ridder: Essays on Polarization and Inequality

Abstract

This thesis comprises three self-contained essays.

Essay I: Opinions are shaped within a social environment, which existing social learning models often assume to be static. However, social environments evolve through individual actions over time. This essay introduces a model where echo chambers form as communication between agents depends on their actions. Agents with similar behaviors are more likely to communicate. We find that this model can exhibit: (1) Polarization of opinions, where opinions cluster into different groups; (2) Failure of the wisdom of crowds, as the average opinion does not approach the average information signal, even if all signals are drawn from the same distribution; and (3) Path dependence, where the average opinion converges to a level that depends on the initial distribution of opinions. Unlike existing models of polarization, learning in this model is assimilative, meaning that opinions are more similar after communication compared to before. Unlike existing models with assimilative learning, these results support long-term differences in opinions without restricting communication between agents.

Essay II: This essay examines how expectation formation processes can lead to biases in expectations about the value of education using a social learning model. This bias arises from segregation within social networks, where agents are more likely to communicate with others from similar socioeconomic backgrounds. The results suggest a link between socioeconomic segregation and the inter-generational persistence of socioeconomic status that has not been extensively explored in the literature so far. Simulation results indicate that this link strengthens under conditions of high segregation and moderate educational gains.

Essay III (co-authored with Charlotte Paulie and Kerstin Westergren): For the past several decades, wealth inequality has increased in many countries. Do changes in the tax system contribute to these trends? Using a quantitative model, we examine the effect on wealth inequality of changing from a comprehensive to a dual tax system. We start with a standard open-economy incomplete-markets model, to which we add an entrepreneurial sector. The entrepreneurs in the model exploit the duality of the tax system after the reform by declaring income as capital (taxed at a flat rate) rather than labor income (taxed progressively). The model is parameterized to match the characteristics of the Swedish economy under dual taxation. In contrast to previous studies, we estimate the parameters of the stochastic process for entrepreneurial income using micro-data observations. We find that the introduction of a dual tax system increases wealth inequality and that the possibility of the entrepreneurs to declare income as capital plays an important role for this result. We also find that the level of aggregate capital and the share of entrepreneurs is higher in an economy with a dual tax system.