Background:

Inequality increased in recent years. Among the explanatory forces recent improvements in the information and communication technology play a dominant role. The reason is that those improvements facilitate certain forms of cooperation among agents which changes the division of the economic surplus.

Methods:

In order to study how different forms of cooperation affect inequality, I develop a model of cooperation among heterogeneously talented agents allowing for two types of cooperation: Between-task cooperation and within-task cooperation. The former reflects the assignment of different agents to different tasks. The latter represents the reassignment of tasks in case of non-compliance of some agent. The costs of this form of cooperation decreased substantially due to the spread of internet, e-mail, cellular phones, and wireless technology. The equilibrium allocation is characterized, particularly the equilibrium sorting of agents into cooperations and the matching between agents.

Results:

Cooperation leads to increasing inequality at the top and decreasing inequality at the bottom of the talent distribution in comparison to a hypothetical situation without any division of labor. Additionally, within-task cooperation is shown to be more inequality-enhancing than between-task cooperation. Thus, the model is able to generate the recent spike in income inequality due to the ICT revolution in recent years. Moreover, the model implies a positive correlation between higher moments of the talent distribution and the skill premium which is consistent with the empirical evidence and sheds some light on potential evolutions in inequality due to changes in the distribution of task difficulty over time.

Conclusions:

Recent improvements in the information and communication technology is likely to cause new spikes in inequality. The society has to be aware of those tendencies to fight poverty and the exclusion of large parts of the society when it comes to economic development.