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Equilibrium Income Inequality among Identical Agents

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Author Info
Freeman, Scott

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Abstract

The paper offers a theory of income differences in which income inequality exists and persists despite identical tastes and talents. Teams of unskilled labor supervised by schooled managers produce goods with increasing returns to scale. Agents are assumed unable to borrow to fund the human capital investment needed to become managers. Despite ex ante identical agents, the model displays the following equilibrium phenomena: (1) risk-averse agents accept fair gambles, implying an unequal ex post distribution of unearned income; (2) agents agree to publicly subsidize education, although those receiving the subsidy have the highest material wealth; and (3) incomes and educational differences are perpetuated from generation to generation. Copyright 1996 by University of Chicago Press.

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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 104 (1996)
Issue (Month): 5 (October)
Pages: 1047-64
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Handle: RePEc:ucp:jpolec:v:104:y:1996:i:5:p:1047-64

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  16. Fernandez, R., 1998. "Education and Borrowing Constraints: Tests vs Prices," Working Papers 98-17, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  17. Mausumi Das, 2002. "Persistent Inequality: An Explanation Based on Limited Parental Altruism," Working papers 101, Centre for Development Economics, Delhi School of Economics. [Downloadable!]
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  19. Kiminori Matsuyama, 2002. "On the Rise and Fall of Class Societies," CIRJE F-Series CIRJE-F-173, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
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