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Educational Opportunity and Income Inequality

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  • Igal Hendel
  • Joel Shapiro
  • Paul Willen

Abstract

Since World War II, the United States government has made improved access to higher education a priority. This effort has substantially increased the number of people who complete college - generally thought to be a good thing. We show, however, that such policies can actually increase income inequality. The mechanism that drives our results is the "signaling" role of education first explored by Spence (1973). We focus on government policies that reduce the effective interest rate on borrowing for education. When borrowing for education is difficult, lack of a college education could mean that one is either of low ability or high ability but has low financial resources. Wages and income reflect the presence of high ability individuals in the uneducated pool. When government programs make borrowing easier, high ability types get educated and leave the uneducated pool. We demonstrate our argument by solving for the relationship between the effective interest rate and income inequality in the steady state of a dynamic asymmetric information model.

Suggested Citation

  • Igal Hendel & Joel Shapiro & Paul Willen, 2003. "Educational Opportunity and Income Inequality," Working Papers 89, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:89
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    Cited by:

    1. Theodore Koutmeridis, 2013. "The Market for "Rough Diamonds": Information, Finance and Wage Inequality," CDMA Working Paper Series 201307, Centre for Dynamic Macroeconomic Analysis, revised 14 Oct 2013.
    2. David A. Green, 2007. "A Cautionary Discussion about Relying on Human Capital Policy to Meet Redistributive Goals," Canadian Public Policy, University of Toronto Press, vol. 33(4), pages 397-418, December.
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    6. Heshmati, Almas & Kim, Jungsuk, 2014. "A Survey of the Role of Fiscal Policy in Addressing Income Inequality, Poverty Reduction and Inclusive Growth," IZA Discussion Papers 8119, Institute for the Study of Labor (IZA).
    7. Bergh, Andreas & Fink, Günther, 2009. "Higher education, elite institutions and inequality," European Economic Review, Elsevier, vol. 53(3), pages 376-384, April.
    8. Atayev, Atabek, 2013. "On the Earliest Economic Growth and Income Inequality; or Modified Old Philosophical, Forgotten or Ignored, Study Reconsidered and Developed," MPRA Paper 45448, University Library of Munich, Germany.
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    More about this item

    Keywords

    Education signalling; college premium; college loans;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • I28 - Health, Education, and Welfare - - Education - - - Government Policy
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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