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The Effect of Better Information on Income Inequality

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  • Bernhard Eckwert

    ()

  • Itzhak Zilcha

Abstract

We 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 individual’s 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.

(This abstract was borrowed from another version of this item.)

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File URL: http://hdl.handle.net/10.1007/s00199-006-0120-8
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 32 (2007)
Issue (Month): 2 (August)
Pages: 287-307

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Handle: RePEc:spr:joecth:v:32:y:2007:i:2:p:287-307

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Related research

Keywords: Information system; Income inequality; Risk sharing markets; D80; J24; J30;

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References

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  1. Orazem, Peter & Tesfatsion, Leigh S., 1997. "Macrodynamic Implications of Income Transfer Policies for Human Capital Investment and School Effort," Staff General Research Papers 1683, Iowa State University, Department of Economics.
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Citations

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Cited by:
  1. Juergen Jung, 2008. "The Timing of Redistribution," Caepr Working Papers 2008-015, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  2. Bidner, Chris, 2010. "Pre-match investment with frictions," Games and Economic Behavior, Elsevier, vol. 68(1), pages 23-34, January.
  3. Piergiuseppe Morone, 2004. "Investigating The Effects Of Information On Income Distribution Using Experimental Data," Experimental 0407006, EconWPA.

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