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Reparations and Persistent Racial Wealth Gaps

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  • Job Boerma
  • Loukas Karabarbounis

Abstract

Reparations is a policy proposal aiming to address the wealth gap between Black and White households. We provide a first formal analysis of the economics of reparations using a long-run model of heterogeneous dynasties with an occupational choice and bequests. Our innovation is to introduce endogenous dispersion of beliefs about risky returns, reflecting differences in dynasties' experiences with entrepreneurship over time. Feeding the exclusion of Black dynasties from labor and capital markets as driving force, the model quantitatively reproduces current and historical racial gaps in wealth, income, entrepreneurship, mobility, and beliefs about risky returns. We use the model to evaluate reparations and find that transfers eliminating the racial gap in average wealth today do not lead to wealth convergence in the long run. The logic is that century-long exclusions lead Black dynasties to enter into reparations with pessimistic beliefs about risky returns and to forego investment opportunities. We conclude by showing that entrepreneurial subsidies are more effective than wealth transfers in achieving racial wealth convergence in the long run.

Suggested Citation

  • Job Boerma & Loukas Karabarbounis, 2021. "Reparations and Persistent Racial Wealth Gaps," Working Papers 776, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmwp:90186
    DOI: 10.21034/wp.776
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    2. Kuhn, Moritz & Bartscher, Alina & Schularick, Moritz & Wachtel, Paul, 2021. "Monetary policy and racial inequality," CEPR Discussion Papers 15734, C.E.P.R. Discussion Papers.
    3. Tan, Eugene & Zeida, Teegawende H., 2024. "Consumer demand and credit supply as barriers to growth for Black-owned startups," Journal of Monetary Economics, Elsevier, vol. 143(C).
    4. Ellora Derenoncourt & Chi Hyun Kim & Moritz Kuhn & Moritz Schularick, 2024. "Unemployment risk, portfolio choice, and the racial wealth gap," CRC TR 224 Discussion Paper Series crctr224_2024_508, University of Bonn and University of Mannheim, Germany.
    5. Eden, Maya, 2023. "Quantifying racial discrimination in the 1944 G.I. bill," Explorations in Economic History, Elsevier, vol. 90(C).
    6. Ewens, Michael, 2022. "Race and Gender in Entrepreneurial Finance," SocArXiv djf8z, Center for Open Science.
    7. Arlen Guarin & Juliana Londoño-Vélez & Christian Posso, 2023. "Reparations as Development? Evidence from Victims of the Colombian Armed Conflict," Borradores de Economia 1236, Banco de la Republica de Colombia.
    8. Ellora Derenoncourt & Chi Hyun Kim & Moritz Kuhn & Moritz Schularick, 2024. "Unemployment Risk, Portfolio Choice, and the Racial Wealth Gap," Opportunity and Inclusive Growth Institute Working Papers 086, Federal Reserve Bank of Minneapolis.
    9. Ellora Derenoncourt & Chi Hyun Kim & Moritz Kuhn & Moritz Schularick, 2023. "Unemployment Risk, Portfolio Choice, and the Racial Wealth Gap," ECONtribute Discussion Papers Series 265, University of Bonn and University of Cologne, Germany.
    10. Ellora Derenoncourt & Chi Hyun Kim & Moritz Kuhn & Moritz Schularick, 2023. "Unemployment Risk, Portfolio Choice, and the Racial Wealth Gap," Working Papers 332, Princeton University, Department of Economics, Center for Economic Policy Studies..
    11. Katya Kartashova & Xiaoqing Zhou, 2021. "Wealth Inequality and Return Heterogeneity During the COVID-19 Pandemic," Working Papers 2114, Federal Reserve Bank of Dallas.
    12. Jean-Felix Brouillette & Charles I. Jones & Peter J. Klenow, 2021. "Race and Economic Well-Being in the United States," NBER Working Papers 29539, National Bureau of Economic Research, Inc.
    13. Dossche, Maarten & Kolndrekaj, Aleksandra & Propst, Maximilian & Ramos Perez, Javier & Slacalek, Jiri, 2022. "Immigrants and the distribution of income and wealth in the euro area: first facts and implications for monetary policy," Working Paper Series 2719, European Central Bank.

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    More about this item

    Keywords

    Reparations; Race gaps; Wealth; Entrepreneurship; Beliefs;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination

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