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

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  • Gustavo A. Marrero

    () (Universidad de La Laguna, IUDR and CAERP)

  • Juan G. Rodriguez

    () (Universidad Complutense de Madrid)

Abstract

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.

Suggested Citation

  • Gustavo A. Marrero & Juan G. Rodriguez, 2014. "Inequality and development: the role of opportunities and free-will," Working Papers 327, ECINEQ, Society for the Study of Economic Inequality.
  • Handle: RePEc:inq:inqwps:ecineq2014-327
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    File URL: http://www.ecineq.org/milano/WP/ECINEQ2014-327.pdf
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    Keywords

    inequality of opportunity; inequality of free-will; human capital accumulation.;

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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