A Theory of Persistent Income Inequality
This paper explores the dynamics of income inequality by studying the evolution of human capital investment and neighborhood choice for a population of families. Parents affect the conditional probability distribution of their children's income through the choice of a neighborhood in which to live. Neighborhood location affects children both through local public finance of education as well as through sociological effects. These forces combine to create incentives for wealthier families to segregate themselves into economically homogeneous neighborhoods. Economic stratification combines with strong neighborhood-wide feedback effects to transmit economic status across generations, leading to persistent income inequality. Copyright 1996 by Kluwer Academic Publishers
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