Income Redistribution as Human Capital Insurance
This paper considers whether empirical evidence exists that is consistent with the view of income redistribution as human capital insurance. If parents can invest in their children with schooling and bequests, but the returns to schooling are risky because diversification is limited, then, in the absence of private insurance, risk-averse parents may choose to impose redistribution on their children's generation. Under certain conditions, the desired amount of income redistribution rises with the return to human capital. Empirically, cross-country comparisons show a positive relation between industrial activity and income redistribution, holding income constant, a relation that is consistent with the theory, if the return to human capital investment is raised by industrialization. Of course there may be other explanations for this finding.