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An Assignment Model of Knowledge Diffusion and Income Inequality

Listed author(s):
  • Luttmer, Erzo G. J.

    (Federal Reserve Bank of Minneapolis)

Randomness in individual discovery disperses productivities, whereas learning from others keeps productivities together. Long-run growth and persistent earnings inequality emerge when these two mechanisms for knowledge accumulation are combined. This paper considers an economy in which those with more useful knowledge can teach others, with competitive markets assigning students to teachers. In equilibrium, students with an ability to learn quickly are assigned to teachers with the most productive knowledge. This sorting on ability implies large differences in earnings distributions conditional on ability, as shown using explicit formulas for the tail behavior of these distributions.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 509.

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Length: 42 pages
Date of creation: 27 Mar 2015
Handle: RePEc:fip:fedmsr:509
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