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Inequality and development: the role of opportunities and free-will

  • Gustavo A. Marrero

    ()

    (Universidad de La Laguna, IUDR and CAERP)

  • Juan G. Rodriguez

    ()

    (Universidad Complutense de Madrid)

Individual income is determined by free-will actions related to the level of effort exerted and by opportunities determined by aspects beyond the individual's control, such as family background, race, place of birth or health endowments. Taking human capital as the main engine of development, we build a general equilibrium overlapping generations model to study the effect of inequality of free-will and inequality of opportunity on real per capita income. When the process of human capital accumulation is convex, we show that inequality of opportunity has a negative and monotone impact on this degree of development, while the effect of inequality of free-will is positive. However, when human capital is accumulated according to a non-convex process, multiplicity of equilibria and poverty traps arise. For economies with a low percentage of trapped dynasties (rich), the same result as for the convex model is obtained. However, for poor economies, while the relationship between free-will inequality and development generally remains positive, that between inequality of opportunity and human capital takes on an inverted U-shape.

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File URL: http://www.ecineq.org/milano/WP/ECINEQ2014-327.pdf
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Paper provided by ECINEQ, Society for the Study of Economic Inequality in its series Working Papers with number 327.

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Length: 53 pages
Date of creation: Mar 2014
Handle: RePEc:inq:inqwps:ecineq2014-327
Contact details of provider: Web page: http://www.ecineq.org
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