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Endogenous Selection of Comparison Groups, Human Capital Formation, and Tax Policy

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  • ODED STARK
  • WALTER HYLL
  • YONG WANG

Abstract

This paper considers a setting in which the acquisition of human capital entails a change of location in social space that causes individuals to revise their comparison groups. Skill levels are viewed as occupational groups, and moving up the skill ladder by acquiring additional human capital, which in itself is rewarding, leads to a shift in the individual’s inclination to compare himself with a different, and on average better-paid, comparison group, which in itself is penalizing. The paper sheds new light on the dynamics of human capital formation, and suggests novel policy interventions to encourage human capital formation in the aggregate and, at the same time, reduce inter-group income inequality.

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Bibliographic Info

Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 79 (2012)
Issue (Month): 313 (01)
Pages: 62-75

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Handle: RePEc:bla:econom:v:79:y:2012:i:313:p:62-75

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References

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  1. Clark, Andrew E. & Frijters, Paul & Shields, Michael A., 2007. "Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles," IZA Discussion Papers 2840, Institute for the Study of Labor (IZA).
  2. Michael J. Boskin, 1975. "Notes on the Tax Treatment of Human Capital," NBER Working Papers 0116, National Bureau of Economic Research, Inc.
  3. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers 537, Stockholm - International Economic Studies.
  4. Gerry Mooney, 2009. "The Spirit Level: Why More Equal Societies Almost Always Do Better," Local Economy, Taylor and Francis Journals, vol. 24(8), pages 705-706.
  5. Philippe Belley & Lance Lochner, 2008. "The Changing Role of Family Income and Ability in Determining Educational Achievement," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers 20081, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
  6. Alberto Alesina & Dani Rodrik, 1991. "Distributive Politics and Economic Growth," NBER Working Papers 3668, National Bureau of Economic Research, Inc.
  7. Diamond, Peter A, 1998. "Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates," American Economic Review, American Economic Association, vol. 88(1), pages 83-95, March.
  8. Flavio Cunha & James J. Heckman, 2009. "The Economics and Psychology of Inequality and Human DEvelopment," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 320-364, 04-05.
  9. Erzo F. P. Luttmer, 2005. "Neighbors as Negatives: Relative Earnings and Well-Being," The Quarterly Journal of Economics, MIT Press, vol. 120(3), pages 963-1002, August.
  10. Stark, Oded & Fan, C. Simon, 2010. "A Theory of Migration as a Response to Occupational Stigma," Economics Series 247, Institute for Advanced Studies.
  11. George A. Akerlof, 1997. "Social Distance and Social Decisions," Econometrica, Econometric Society, vol. 65(5), pages 1005-1028, September.
  12. Stutzer, Alois, 2004. "The role of income aspirations in individual happiness," Journal of Economic Behavior & Organization, Elsevier, vol. 54(1), pages 89-109, May.
  13. Marek Kapicka, 2006. "Optimal Income Taxation with Human Capital Accumulation and Limited Record Keeping," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(4), pages 612-639, October.
  14. Yitzhaki, Shlomo, 1979. "Relative Deprivation and the Gini Coefficient," The Quarterly Journal of Economics, MIT Press, vol. 93(2), pages 321-24, May.
  15. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
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Cited by:
  1. Sorger, Gerhard & Stark, Oded, 2013. "Income redistribution going awry: The reversal power of the concern for relative deprivation," Journal of Economic Behavior & Organization, Elsevier, vol. 86(C), pages 1-9.
  2. Stark, Oded, 2012. "Policy responses to a dark side of the integration of regions," University of Tuebingen Working Papers in Economics and Finance 28, University of Tuebingen, Faculty of Economics and Social Sciences.
  3. Stark, Oded, 2013. "Stressful Integration," European Economic Review, Elsevier, vol. 63(C), pages 1-9.
  4. Stark, Oded & Kobus, Martyna & Jakubek, Marcin, 2011. "A concern about low relative income, and the alignment of utilitarianism with egalitarianism," University of Tuebingen Working Papers in Economics and Finance 21, University of Tuebingen, Faculty of Economics and Social Sciences.
  5. Stark, Oded & Jakubek, Marcin & Falniowski, Fryderyk, 2014. "Reconciling the Rawlsian and the utilitarian approaches to the maximization of social welfare," Economics Letters, Elsevier, vol. 122(3), pages 439-444.
  6. Stark, Oded, 2012. "Integration, social distress, and policy formation," Economics Letters, Elsevier, vol. 115(2), pages 318-321.
  7. Stark, Oded, 2012. "Policy responses to a dark side of the integration of regions and nations," Discussion Papers 122036, University of Bonn, Center for Development Research (ZEF).

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