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

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  • Stark, Oded
  • Hyll, Walter

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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File URL: http://mpra.ub.uni-muenchen.de/30623/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28909.

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Date of creation: 2010
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Handle: RePEc:pra:mprapa:28909

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Keywords: Human capital formation; Skill levels as occupational groups; Interpersonal comparisons; Relative deprivation; Tax policy; Subsidization;

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References

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  1. Erzo F. P. Luttmer, 2005. "Neighbors as Negatives: Relative Earnings and Well-Being," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(3), pages 963-1002, August.
  2. 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.
  3. Stark, Oded & Fan, Simon C., 2010. "A Theory of Migration as a Response to Occupational Stigma," MPRA Paper 21688, University Library of Munich, Germany.
  4. 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).
  5. Alesina, Alberto & Rodrik, Dani, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 109(2), pages 465-90, May.
  6. Diamond, Peter A, 1998. "Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates," American Economic Review, American Economic Association, vol. 88(1), pages 83-95, March.
  7. Philippe Belley & Lance Lochner, 2007. "The Changing Role of Family Income and Ability in Determining Educational Achievement," Working Papers 2011-037, Human Capital and Economic Opportunity Working Group.
  8. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers, Stockholm - International Economic Studies 537, Stockholm - International Economic Studies.
  9. Flavio Cunha & James J. Heckman, 2009. "The Economics and Psychology of Inequality and Human DEvelopment," Journal of the European Economic Association, MIT Press, MIT Press, vol. 7(2-3), pages 320-364, 04-05.
  10. Alois Stutzer, . "The Role of Income Aspirations in Individual Happiness," IEW - Working Papers 124, Institute for Empirical Research in Economics - University of Zurich.
  11. George A. Akerlof, 1997. "Social Distance and Social Decisions," Econometrica, Econometric Society, Econometric Society, vol. 65(5), pages 1005-1028, September.
  12. 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.
  13. Yitzhaki, Shlomo, 1979. "Relative Deprivation and the Gini Coefficient," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(2), pages 321-24, May.
  14. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  15. Michael J. Boskin, 1975. "Notes on the Tax Treatment of Human Capital," NBER Working Papers 0116, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Stark, Oded, 2012. "Integration, social distress, and policy formation," University of Tuebingen Working Papers in Economics and Finance 25, University of Tuebingen, Faculty of Economics and Social Sciences.
  2. 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).
  3. Sorger, Gerhard & Stark, Oded, 2012. "Income redistribution going awry: The reversal power of the concern for relative deprivation," Discussion Papers 142407, University of Bonn, Center for Development Research (ZEF).
  4. Stark, Oded, 2013. "Stressful Integration," Discussion Papers 150233, 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," Discussion Papers 117257, University of Bonn, Center for Development Research (ZEF).
  6. Stark, Oded & Jakubek, Marcin & Falniowski, Fryderyk, 2013. "Reconciling the Rawlsian and the utilitarian approaches to the maximization of social welfare," University of Tuebingen Working Papers in Economics and Finance 65, University of Tuebingen, Faculty of Economics and Social Sciences.
  7. 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.

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