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Love and Money: A Theoretical and Empirical Analysis of Household Sorting and Inequality

  • Raquel Ferndez
  • Nezih Guner
  • John Knowles

This paper examines the interactions between household matching, inequality, and per capita income. We develop a model in which agents decide whether to become skilled or unskilled, form households, consume and have children. We show that the equilibrium sorting of spouses by skill type (their correlation in education) is increasing as a function of the skill premium. In the absence of perfect capital markets, the economy can converge to different steady states, depending upon initial conditions. The degree of marital sorting, wage inequality, and fertility differentials are positively correlated across steady states and negatively correlated with per capita income. We use household surveys from 34 countries to construct several measures of the skill premium and of the degree of correlation of spouses' education (marital sorting). For all our measures, we find a positive and significant relationship between the two variables.

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Paper provided by Penn Economics Department in its series Penn CARESS Working Papers with number d3d043317c8e26c4039c21aa0b769a3f.

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Date of creation: 2001
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Handle: RePEc:cla:penntw:d3d043317c8e26c4039c21aa0b769a3f
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  1. Aiyagari, S.R. & Greenwood, J. & Guner, N., 1999. "On the State of the Union," RCER Working Papers 462, University of Rochester - Center for Economic Research (RCER).
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