Wealth Inequality and the Exploration of Novel Alternatives

I investigate whether wealth inequality hinders the discovery of novel alternatives in a competitive screening model. Agents can engage in experimentation, which may lead to the discovery of superior technologies, while wasting time with inferior ones. Talented agents are better at weeding out inferior actions, but talent is unobservable by lenders. When agents are poor, this causes an adverse selection problem and experimentation is also pursued by untalented agents. As economies become wealthier, this misallocation problem weakens. Higher inequality worsens the misallocation problem when the economy is rich, but can increase efficiency in poor economies.