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Income Inequality, Mobility, and the Accumulation of Capital: The Role of Heterogeneous Labor Productivity

  • Cecilia García-Peñalosa

    ()

    (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM))

  • Stephen J. Turnovsky

    ()

    (University of Washington - University of Washington)

We examine the determinants of income inequality and mobility in a Ramsey model with elastic labor supply. Individuals differ both in their initial capital endowment and productive ability (labor endowment). With two sources of heterogeneity, initially poorer agents may catch up with the income and wealth of initial richer ones, implying that the Ramsey model is compatible with rich distributional dynamics. We show that the elasticity of the labor supply plays a key role in the extent of mobility in the economy. Capital-rich individuals supply less labor while ability-rich agents tend to work more. The more elastic the labor supply is, the stronger these effects tend to be and hence the greater the degree of income mobility is.

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Paper provided by HAL in its series Working Papers with number halshs-00793209.

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Date of creation: Apr 2012
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Handle: RePEc:hal:wpaper:halshs-00793209
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