The Effect of Better Information on Income Inequality
AbstractWe consider an OLG economy with endogenous investment in human capital. Heterogeneity in individual human capital levels is generated by random innate ability. The production of human capital depends on each individualâs investment in education. This investment decision is taken only after observing a signal which is correlated to his/her true ability, and which is used for updating beliefs. Thus, a better information system affects the distribution of human capital in each generation. Assuming separable and identical preferences for all individuals, we derive the following results in equilibrium: (a) If the relative measure of risk aversion is less (more) than 1 then more information raises (reduces) income inequality. (b) When a risk sharing market is available better information results in higher inequality regardsless of the measure risk aversion.
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Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 32 (2007)
Issue (Month): 2 (August)
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Web page: http://link.springer.de/link/service/journals/00199/index.htm
Other versions of this item:
- Bernhard Eckwert & Itzhak Zilcha, 2003. "The Effect of Better Information on Income Inequality," CESifo Working Paper Series 969, CESifo Group Munich.
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
- J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
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