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Efficiency of Screening and Labor Income Inequality

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  • BERNHARD ECKWERT
  • ITZHAK ZILCHA

Abstract

We analyze the importance of information about individual skills for understanding human capital accumulation and income inequality. The paper uses the framework of an overlapping generations economy with endogenous investment in human capital. Agents in each generation differ by random individual ability, or talent, which affects the screening process. The human capital of an agent depends on both his talent and his investment in education. The investment decision is based on a public signal (test outcome), which screens all agents for their talents. We analyze how a better information system, which allows more efficient screening, affects investment in education and, hence, income inequality in equilibrium. As a main result, we find that, typically, less inequality in the distribution of actual incomes can only be achieved at the expense of more inequality in the distribution of income opportunities.

Suggested Citation

  • Bernhard Eckwert & Itzhak Zilcha, 2008. "Efficiency of Screening and Labor Income Inequality," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(1), pages 77-98, February.
    • Handle: RePEc:bla:jpbect:v:10:y:2008:i:1:p:77-98
    DOI: 10.1111/j.1467-9779.2008.00352.x
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    References listed on IDEAS

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    1. Athey, Susan & Levin, Jonathan, 2018. "The value of information in monotone decision problems," Research in Economics, Elsevier, vol. 72(1), pages 101-116.
    2. Roland Benabou & Efe A. Ok, 2000. "Mobility as Progressivity: Ranking Income Processes According to Equality of Opportunity," Working Papers 150, Princeton University, School of Public and International Affairs, Discussion Papers in Economics.
    3. Juan José Ganuza & José S. Penalva, 2006. "On information and competition in private value auctions," Economics Working Papers 937, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2006.
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    Cited by:

    1. Brandt, Nikolai M. & Eckwert, Bernhard & Várdy, Felix, 2021. "Bayesian learning with variable prior," Journal of Mathematical Economics, Elsevier, vol. 97(C).
    2. Bidner, Chris, 2010. "Pre-match investment with frictions," Games and Economic Behavior, Elsevier, vol. 68(1), pages 23-34, January.
    3. Brandt, Nikolai & Drees, Burkhard & Eckwert, Bernhard & Várdy, Felix, 2014. "Information and the dispersion of posterior expectations," Journal of Economic Theory, Elsevier, vol. 154(C), pages 604-611.

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