Knowledge diffusion and Inequality. Learning by Interacting and the Risk of Exclusion

The aim of this work is to investigate the importance of interaction between people in determining the rise (or fall) in income inequality and polarization. We do this through investigating the dynamics of knowledge diffusion where knowledge is acquired through a combination of interactive and individual learning. We suggest that in the light of this new definition of knowledge, choosing the optimal level of education is no longer an individual exercise of present and future utility maximisation as suggested by formal human capital theory, as other external (environmental) variables might affect the individual decision of investment. The focus of the study is restricted to one developing country (Chile) and the inequality measure considered is solely wage inequality. The reason we restricted the spectrum of our investigation in such a way is twofold. The geographical dimension of the investigation was determined by both the need for good quality databases and the author’s wish to study a developing country with a history of high inequality as well as high growth. The subsequent decision to restrict the spectrum of the enquiry to wage inequality was introduced after observing that the high level of inequality in Chile is largely due to inequality in wages. We study the process of learning by interaction through the development of three models. The first mainly aims at measuring the impact of network interactions (i.e. face-to-face interaction) extending classic wage equations to incorporate the twofold definition of learning. The second and third models try to understand how interactive learning actually takes place. We did so using a simulation approach developing two agent-based simulation models in which agents interact by word of mouth, exchanging knowledge with their neighbours. The results obtained in this thesis consistently show the importance of learning by interacting and the risks of exclusion and inequality from neglecting it.