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Title: Heterogeneous economies : implications for inequality and financial stability
Author: Galanis, Giorgos
ISNI:       0000 0004 6423 1270
Awarding Body: University of Warwick
Current Institution: University of Warwick
Date of Award: 2017
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In the first chapter we explore the relationship between income inequality and the Utilitarian ethic in a dynamic environment with endogenous preferences. Classical Utilitarians, like Bentham, believed that utilitarian principles are compatible with egalitarian ones. Although this claim is not uncontroversial, this relation holds for a utilitarian distribution of a given good among people, with identical concave utilities and exogenously set preferences. This idea breaks down if the preferences are different. In this paper we allow for endogenous preferences influenced by the existence of habits. We show how the inclusion of habit formation, studied in a dynamic environment, has egalitarian implications for a classical utilitarian distribution. Based on this result we are able to argue that Bentham’s positive views of decreasing inequality due to different consumption habits are consistent with his normative views regarding distribution. The second chapter explores the question of whether long-term income inequality consistent with equality of opportunity (EOp) ethic. In order to provide an answer we study the effectiveness of intergenerational EOp policies in an environment with two social groups and infinite generations of individuals, where the outcomes of one generation define the circumstances of the next. Circumstances in this paper have to do either with different preferences among individuals from different social groups or with both resources and preferences due to these resources. We show that in the former case EOp policies reduce inequality and also the EOp policy is the same as the Utilitarian one. In the latter case, inequality is not reduced and its level depends on the relative population of the two social groups. The third chapter studies an economy where privately informed hedge funds trade a risky asset in order to exploit potential mispricings. Hedge funds are allowed to have access to credit, by using their risky assets as collateral. We analyse the role of the degree of heterogeneity among hedge funds’s demand for the risky asset in the emergence of clustering of defaults. We find that fire-sales caused by margin calls is a necessary, yet not a sufficient condition for defaults to be clustered. We show that when the degree of heterogeneity is sufficiently high, poorly performing hedge funds are able to obtain a higher than usual market share at the end of the leverage cycle, which leads to an improvement of their performance. Consequently, their survival time is prolonged, increasing the probability of them remaining in operation until the downturn of the next leverage cycle. This leads to the increase of the probability of poorly and high-performing hedge funds to default in sync at a later time, and thus the probability of collective defaults.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available
Keywords: HB Economic Theory