Poor Rationality. How Inequality Emerges as a Self-sustaining Equilibrium in Bargaining

This project analyzes the emergence of inequality, the tendency of inequality to reinforce itself and the lack of social mobility that often goes along with it (cf. Haughton, Khandker 2009; McLeod et al. 2014). It employs an agent-based model to illustrate that rich agents are systematically fa-vored when distributional issues are settled without institutional control. To show this, we mainly focus on the different bargaining strategies that agents could employ, and on which impact those strategies have on an agent's success. At the same time our model contributes to the analytical debate about the concept of rationality. We argue that the standard notion of rationality, as ex-pected utility maximization, falls short of capturing important aspects, such as for example the second level problem of information acquisition (cf. Kreps, Wilson 1982; Hart, Moore 1999). Our research question is: How does the individual wealth level effect an agent's ability to be successful in distributional games, and how does this influence the level of inequality in the population? Our hypothesis is that poverty based effects on rationality will reinforce inequality. We present a simulation of iterated, symmetric bargaining, in which agents learn to adapt their strategic behavior in order to maximize payoffs (Lipman 1986). One main finding is that inequality can emerge as a self-sustaining equilibrium. A central driving factor of the model is that the agents' strategic choices in bargaining games do bear a direct connection to the information col-lected by an agent. We show that different choices of strategies may significantly skew the con-tent of the information collected, thereby structurally preventing the agent from acting optimally in future interactions. In particular, poorer agents will end up systematically miss-estimating the potential gains from riskier strategies.