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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.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 969.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_969

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Keywords: information system; income inequality; risk sharing markets;

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Cited by:
  1. Bidner, Chris, 2010. "Pre-match investment with frictions," Games and Economic Behavior, Elsevier, vol. 68(1), pages 23-34, January.
  2. Piergiuseppe Morone, 2004. "Investigating The Effects Of Information On Income Distribution Using Experimental Data," Experimental 0407006, EconWPA.
  3. Gerhard Glomm & Juergen Jung, 2013. "The Timing of Redistribution," Southern Economic Journal, Southern Economic Association, vol. 80(1), pages 50-80, July.

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