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Educational Opportunity and Income Inequality

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  • Igal Hendel
  • Joel Shapiro
  • Paul Willen

Abstract

Since World War II, the United States government has made improved access to higher education a priority. This effort has substantially increased the number of people who complete college - generally thought to be a good thing. We show, however, that such policies can actually increase income inequality. The mechanism that drives our results is the "signaling" role of education first explored by Spence (1973). We focus on government policies that reduce the effective interest rate on borrowing for education. When borrowing for education is difficult, lack of a college education could mean that one is either of low ability or high ability but has low financial resources. Wages and income reflect the presence of high ability individuals in the uneducated pool. When government programs make borrowing easier, high ability types get educated and leave the uneducated pool. We demonstrate our argument by solving for the relationship between the effective interest rate and income inequality in the steady state of a dynamic asymmetric information model.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 89.

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Date of creation: Feb 2003
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Handle: RePEc:bge:wpaper:89

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Keywords: Education signalling; college premium; college loans;

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Citations

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Cited by:
  1. Patricia Crifo, 2008. "Skill Supply and Biased technical change," Post-Print hal-00243031, HAL.
  2. Heshmati, Almas & Kim, Jungsuk, 2014. "A Survey of the Role of Fiscal Policy in Addressing Income Inequality, Poverty Reduction and Inclusive Growth," IZA Discussion Papers 8119, Institute for the Study of Labor (IZA).
  3. Rose, Giuseppe, 2013. "Endogenous ranking in a two-sector urn-ball matching process," Economics Discussion Papers 2013-40, Kiel Institute for the World Economy.
  4. Robert Dur, 2006. "Status-Seeking in Violent Subcultures and the Double Dividend of Zero-Tolerance," Tinbergen Institute Discussion Papers 06-005/1, Tinbergen Institute.
  5. Dilip Mookherjee & Marcello D'Amato, 2010. "Educational Signaling, Credit Constraints and Inequality Dynamics," Boston University - Department of Economics - Working Papers Series WP2010-035, Boston University - Department of Economics.
  6. Rafal Kierzenkowski & Isabell Koske, 2012. "Less Income Inequality and More Growth – Are they Compatible? Part 8. The Drivers of Labour Income Inequality – A Literature Review," OECD Economics Department Working Papers 931, OECD Publishing.
  7. Toshiki Tamai, 2009. "Inequality, unemployment, and endogenous growth in a political economy with a minimum wage," Journal of Economics, Springer, vol. 97(3), pages 217-232, July.
  8. Bednar, Steven & Gicheva, Dora, 2013. "Tax Benefits for Graduate Education: Incentives for Whom?," Working Papers 13-17, University of North Carolina at Greensboro, Department of Economics.
  9. David A. Green, 2007. "A Cautionary Discussion about Relying on Human Capital Policy to Meet Redistributive Goals," Canadian Public Policy, University of Toronto Press, vol. 33(4), pages 397-418, December.
  10. Dean Corbae' & Tzu-Ying Chen, 2010. "Can Credit Market Signalling Improve Labor Market Outcomes?," 2010 Meeting Papers 685, Society for Economic Dynamics.
  11. Theodore Koutmeridis, 2013. "The Market for "Rough Diamonds": Information, Finance and Wage Inequality," CDMA Working Paper Series 201307, Centre for Dynamic Macroeconomic Analysis, revised 14 Oct 2013.
  12. Anil Duman, 2008. "Education and Income Inequality in Turkey: Does Schooling Matter?," Financial Theory and Practice, Institute of Public Finance, vol. 32(3), pages 369-385.
  13. Lam, Kit-Chun & Liu, Pak-Wai, 2011. "Increasing dispersion of skills and rising earnings inequality," Journal of Comparative Economics, Elsevier, vol. 39(1), pages 82-91, March.
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  16. Theodore Koutmeridis, 2013. "The Market for "Rough Diamonds": Information, Finance and Wage Inequality," Discussion Paper Series, Department of Economics 201307, Department of Economics, University of St. Andrews, revised 14 Oct 2013.
  17. Bergh, Andreas & Fink, Günther, 2009. "Higher education, elite institutions and inequality," European Economic Review, Elsevier, vol. 53(3), pages 376-384, April.
  18. Tali Regev, 2007. "Imperfect information, self-selection and the market for higher education," Working Paper Series 2007-18, Federal Reserve Bank of San Francisco.
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