Description

In a dynamic economy, firms continuously form, grow, contract and dissolve. Ultimately, firms form when individuals choose to work together and dissolve as firm members find more attractive opportunities elsewhere. However, changing employment entails costs, such as relocation costs or training costs, that are not smoothed over time and are funded by savings or borrowing. Using an agent based model driven by the perpetual adjustments individuals make in their employment to maximize their utility, we simulate the choices made by individuals regarding where to work and how much effort to put into work. The model explores three scenarios: no costs for employment changes, a cash-in-advance cost constraint on changes, and a cost constraint on changes with an option to borrow from a universal credit-creating lender. Simulation results provide various individual, firm and economy level measures, such as number of firms, their sizes and output, as well as individual wages and wealth. In the presence of lending with any positive interest rate, the model demonstrates that the aggregate quantity of loans grows superlinearly, most individuals have negative wealth and positive individual wealth values are higher than those found in either the no cost or costs without lending scenarios. Therefore, endogenous wage dynamics involving an inability to pursue optimal choices due to debt constraints yields both boundless debt as well as pronounced wealth inequality, even without monetary transfers engendered by rents paid to owners of promissory notes.

Venue

Research Programmes