Equilibrium Income Inequality among Identical Agents
The paper offers a theory of income differences in which income inequality exists and persists despite identical tastes and talents. Teams of unskilled labor supervised by schooled managers produce goods with increasing returns to scale. Agents are assumed unable to borrow to fund the human capital investment needed to become managers. Despite ex ante identical agents, the model displays the following equilibrium phenomena: (1) risk-averse agents accept fair gambles, implying an unequal ex post distribution of unearned income; (2) agents agree to publicly subsidize education, although those receiving the subsidy have the highest material wealth; and (3) incomes and educational differences are perpetuated from generation to generation. Copyright 1996 by University of Chicago Press.
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- Oded Galor & Joseph Zeira, 2013. "Income Distribution and Macroeconomics," Working Papers 2013-12, Brown University, Department of Economics.
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- Loury, Glenn C, 1981. "Intergenerational Transfers and the Distribution of Earnings," Econometrica, Econometric Society, vol. 49(4), pages 843-867, June.
- Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
- Marshall, John M, 1984. "Gambles and the Shadow Price of Death," American Economic Review, American Economic Association, vol. 74(1), pages 73-86, March. Full references (including those not matched with items on IDEAS)
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