Information and Communication Technologies and the Income Distribution: A General Equilibrium Simulation

The special feature of the innovation in the information and communication technologies (ICTs) implies the improvement in the quality of consumption of goods and services including leisure hours, as well as the modification in the production process. The traditional analysis has emphasized solely the modification in the production process. This paper incorporates this special feature in analysing the relation between the innovation and the income distribution. It has been argued that the innovation of ICTs expands the unfairness of income distribution. In the traditional expression, this may be rephrased that the wealthy capitalist class becomes relatively better off, while the poor working class becomes relatively worse off. Assuming three social classes: the entrepreneurs, the capitalists, and the workers, this paper examines how the relative shares of these classes in the national income changes due to the innovation of ICTs. For three types of production functions: Cobb-Douglas type, CES type with negative substitution, and CES type with positive substitution, this paper conducts the comparative statics analysis by actually computing general equilibrium prices for the specified different parameters of ICTs in the production function. This paper derives the completely opposite conclusions between the CES type with negative substitution, and the one with positive substitution. Thus, it is shown by these simulations that theoretically, no definite relation holds between the innovation of ICTs and income distribution (or utility level). In order to derive the definite relation, one must examine what type of production function the economy has.