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

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  • Stark, Oded
  • Hyll, Walter
  • Wang, Yong

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

Paper provided by University of Bonn, Center for Development Research (ZEF) in its series Discussion Papers with number 99415.

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Date of creation: Jan 2011
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Handle: RePEc:ags:ubzefd:99415

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Related research

Keywords: Human capital formation; Skill levels as occupational groups; Interpersonal comparisons; Relative deprivation; Tax policy; Subsidization; Labor and Human Capital; D11; H24; H30; J24;

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References

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  1. 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.
  2. 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.
  3. Stutzer, Alois, 2004. "The role of income aspirations in individual happiness," Journal of Economic Behavior & Organization, Elsevier, vol. 54(1), pages 89-109, May.
  4. Stark, Oded & Fan, C. Simon, 2009. "A Theory of Migration as a Response to Occupational Stigma," Discussion Papers 55363, University of Bonn, Center for Development Research (ZEF).
  5. 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.
  6. Rodrik, Dani & Alesina, Alberto, 1994. "Distributive Politics and Economic Growth," Scholarly Articles 4551798, Harvard University Department of Economics.
  7. 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.
  8. 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.
  9. 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).
  10. 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.
  11. Michael J. Boskin, 1975. "Notes on the Tax Treatment of Human Capital," NBER Working Papers 0116, National Bureau of Economic Research, Inc.
  12. George A. Akerlof, 1997. "Social Distance and Social Decisions," Econometrica, Econometric Society, vol. 65(5), pages 1005-1028, September.
  13. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers 537, Stockholm - International Economic Studies.
  14. Yitzhaki, Shlomo, 1979. "Relative Deprivation and the Gini Coefficient," The Quarterly Journal of Economics, MIT Press, vol. 93(2), pages 321-24, May.
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Cited by:
  1. Stark, Oded, 2013. "Stressful Integration," European Economic Review, Elsevier, vol. 63(C), pages 1-9.
  2. Stark, Oded & Jakubek, Marcin & Falniowski, Fryderyk, 2014. "Reconciling the Rawlsian and the utilitarian approaches to the maximization of social welfare," Discussion Papers 162881, University of Bonn, Center for Development Research (ZEF).
  3. Stark, Oded & Sorger, Gerhard, 2012. "Income redistribution going awry: The reversal power of the concern for relative deprivation," University of Tuebingen Working Papers in Economics and Finance 47, University of Tuebingen, Faculty of Economics and Social Sciences.
  4. Stark, Oded, 2012. "Integration, social distress, and policy formation," Discussion Papers 120179, University of Bonn, Center for Development Research (ZEF).
  5. 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.
  6. 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.
  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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