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The Effect of Better Information on Income Inequality

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  • Bernhard Eckwert

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  • 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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Suggested Citation

  • Bernhard Eckwert & Itzhak Zilcha, 2007. "The Effect of Better Information on Income Inequality," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 32(2), pages 287-307, August.
  • Handle: RePEc:spr:joecth:v:32:y:2007:i:2:p:287-307
    DOI: 10.1007/s00199-006-0120-8
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    References listed on IDEAS

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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. Gerhard Glomm & Juergen Jung, 2013. "The Timing of Redistribution," Southern Economic Journal, Southern Economic Association, vol. 80(1), pages 50-80, July.
    3. Bartak Jakub & Jabłoński Łukasz, 2016. "Human Capital Versus Income Variations: Are They Linked in OECD Countries?," Journal of Management and Business Administration. Central Europe, De Gruyter Open, vol. 24(2), pages 56-73, June.
    4. William Blankenau & Gabriele Camera, 2009. "Public Spending on Education and the Incentives for Student Achievement," Economica, London School of Economics and Political Science, vol. 76(303), pages 505-527, July.
    5. Piergiuseppe Morone, 2004. "Investigating The Effects Of Information On Income Distribution Using Experimental Data," Experimental 0407006, EconWPA.

    More about this item

    Keywords

    Information system; Income inequality; Risk sharing markets; D80; J24; J30;

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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