Essays on the Economics and Psychology of Correlated Multidimensional Heterogeneity in Agents’ Preferences and Abilities

Abstract

Research in economics and psychology has shown that individuals are heterogeneous in their (economically relevant) innate preferences and abilities, and also that heterogeneity along different dimensions is correlated in systematic ways. In the present thesis, I focus on various aspects of a concept in multi-dimensional heterogeneity that may be called the ‘Positive Manifold’: The fact that many of the different factors contributing to earnings inequality between individuals (e.g. cognitive ability, risk tolerance, industriousness, patience, etc.) are observed to be positively correlated in the population. In Chapter 1, I attempt to build a bridge between the sometimes-disconnected economics and psychology literatures and conclude by arguing that some dimensions of the Positive Manifold have not received sufficient attention in economic models. In Chapter 2, I explore the implications of the Positive Manifold for one important class of those models in more detail: I show that the positive correlation between cognitive ability and risk tolerance limits the capacity of the labor income tax to mitigate inequality/raise revenue in a Mirrleesian framework, even in deterministic settings. I conclude the thesis by proposing, in Chapter 3, a novel evolutionary-economic model that can explain how the aforementioned correlation might have evolved as a result of natural selection in our ancestral environment.