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Endogenous selection of comparison groups, human capital formation, and tax policy

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  • Hyll, Walter
  • Stark, Oded
  • 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 Tuebingen, Faculty of Economics and Social Sciences in its series University of Tuebingen Working Papers in Economics and Finance with number 3.

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Date of creation: 2011
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Handle: RePEc:zbw:tuewef:3

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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. Flavio Cunha & James J. Heckman, 2009. "The Economics and Psychology of Inequality and Human Development," NBER Working Papers 14695, National Bureau of Economic Research, Inc.
  2. Luttmer, Erzo F. P., 2004. "Neighbors as Negatives: Relative Earnings and Well-Being," Working Paper Series rwp04-029, Harvard University, John F. Kennedy School of Government.
  3. Diamond, P., 1994. "Optimal Income Taxation: An Exemple with a U-Shaped Pattern of Optimal Marginal Tax Rates," Working papers 94-14, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Philippe Belley & Lance Lochner, 2007. "The Changing Role of Family Income and Ability in Determining Educational Achievement," Journal of Human Capital, University of Chicago Press, vol. 1(1), pages 37-89.
  5. 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.
  6. Stutzer, Alois, 2004. "The role of income aspirations in individual happiness," Journal of Economic Behavior & Organization, Elsevier, vol. 54(1), pages 89-109, May.
  7. 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).
  8. Rodrik, Dani & Alesina, Alberto, 1994. "Distributive Politics and Economic Growth," Scholarly Articles 4551798, Harvard University Department of Economics.
  9. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
  10. Yitzhaki, Shlomo, 1979. "Relative Deprivation and the Gini Coefficient," The Quarterly Journal of Economics, MIT Press, vol. 93(2), pages 321-24, May.
  11. Stark, Oded & Fan, Simon C., 2010. "A Theory of Migration as a Response to Occupational Stigma," MPRA Paper 21688, University Library of Munich, Germany.
  12. Michael J. Boskin, 1975. "Notes on the Tax Treatment of Human Capital," NBER Working Papers 0116, National Bureau of Economic Research, Inc.
  13. George A. Akerlof, 1997. "Social Distance and Social Decisions," Econometrica, Econometric Society, vol. 65(5), pages 1005-1028, September.
  14. 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.
  15. 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.
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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," University of Tuebingen Working Papers in Economics and Finance 28, University of Tuebingen, Faculty of Economics and Social Sciences.
  3. Stark, Oded & Kobus, Martyna & Jakubek, Marcin, 2012. "A concern about low relative income, and the alignment of utilitarianism with egalitarianism," Economics Letters, Elsevier, vol. 114(3), pages 235-238.
  4. 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).
  5. 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.
  6. Stark, Oded, 2013. "Stressful integration," University of Tuebingen Working Papers in Economics and Finance 56, 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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