Sustainable Heterogeneity: Inequality, Growth, and Social Welfare in a Heterogeneous Population

This paper studies social welfare in a heterogeneous population under the criteria of efficiency and sustainable heterogeneity. As is well known, heterogeneity in time preference results in substantial inequality. This paper shows that, even if households have heterogeneous preferences, there is a balanced growth path on which all the optimality conditions of all heterogeneous households are equally and indefinitely satisfied, and heterogeneity is sustainable on this path. The existence of a unique sustainable path will shed new light on social welfare issues, but this path cannot necessarily be naturally obtained by relying only on markets. Sustainable heterogeneity is politically fragile and requires rational―not unconditional―sacrifice and altruism, and interventions by the authority are justified. Sustainable heterogeneity indicates that globalization should be accompanied by measures that support developing countries and that a GDP modified for measures of sustainable heterogeneity may more correctly measure people’s “happiness.” However, it also indicates that inequality is necessary for sustainability and a unique sustainable level of inequality exists.