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Fearing the worst: the importance of uncertainty for inequality

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  • Keith Blackburn
  • David Chivers

Abstract

We present an overlapping generations model in which aspirational agents face uncertainty about the returns to human capital investment. This uncertainty implies the prospect that aspirations will not be fulfilled, the probability of which is greater the lower is the human capital endowment of an agent. We show that agents with sufficiently low human capital endowments may experience such a strong influence of loss aversion that they abstain from human capital investment. We further show how this behaviour may be transmitted through successive generations to cause initial inequalities to persist. These results do not rely on any credit market imperfections, though they may appear as if they do. Copyright Springer-Verlag Berlin Heidelberg 2015

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  • Keith Blackburn & David Chivers, 2015. "Fearing the worst: the importance of uncertainty for inequality," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 60(2), pages 345-370, October.
    • Handle: RePEc:spr:joecth:v:60:y:2015:i:2:p:345-370
    DOI: 10.1007/s00199-015-0876-9
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    More about this item

    Keywords

    Inequality; Uncertainty; Aspirations; Loss aversion; D31; D81; E24;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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