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Educational Signaling, Credit Constraints and Inequality Dynamics

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  • Dilip Mookherjee

    ()
    (Department of Economics, Boston University)

  • Marcello D'Amato

    ()
    (Department of Economics, University of Salerno)

Abstract

We present a dynamic OLG model of educational signaling and inequality with missing credit markets. Agents are characterized by two sources of unobserved heterogeneity: ability and parental income, consistent with empirical evidence on returns to schooling. Both quantity and quality of human capital evolve endogenously. The model generates a Kuznets inverted-U pattern in skill premia similar to historical US and UK experience. In the first (resp. later) phase the skill premium rises (falls), social returns to education exceed (falls below) private returns: under-investment owing to financial imperfections dominate (are dominated by) over-investment owing to signaling distortions. There always exist Pareto-improving policy interventions reallocating education between poor and rich children.

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Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2010-035.

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Length: 47 pages
Date of creation: Jan 2010
Date of revision:
Handle: RePEc:bos:wpaper:wp2010-035

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  1. Freeman, Scott, 1996. "Equilibrium Income Inequality among Identical Agents," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 1047-64, October.
  2. Paul Willen & Igal Hendel & Joel Shapiro, 2004. "Educational Opportunity and Income Inequality," NBER Working Papers 10879, National Bureau of Economic Research, Inc.
  3. Galor, Oded & Zeira, Joseph, 1988. "Income Distribution and Macroeconomics," MPRA Paper 51644, University Library of Munich, Germany, revised 01 Sep 1989.
  4. Card, David, 2001. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," Econometrica, Econometric Society, vol. 69(5), pages 1127-60, September.
  5. Mookherjee, Dilip & Napel, Stefan, 2007. "Intergenerational mobility and macroeconomic history dependence," Journal of Economic Theory, Elsevier, vol. 137(1), pages 49-78, November.
  6. Ljungqvist, Lars, 1993. "Economic underdevelopment : The case of a missing market for human capital," Journal of Development Economics, Elsevier, vol. 40(2), pages 219-239, April.
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