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Risky Human Capital Investment, Income Distribution, and Macroeconomic Dynamics

  • Grossmann, Volker

    ()

    (University of Fribourg)

This paper analyzes the interaction between intergenerational wealth transmission, human capital investments under uninsurable labor income risk, and economic growth in a small open overlapping-generations economy with heterogeneous agents. It demonstrates how the role of the personal income distribution for an economy’s process of development through risky human capital accumulation depends on the shape of the saving function. Consistent with recent empirical evidence, the analysis suggests that the impact of higher inequality on the aggregate human capital stock, and thus, on growth may be positive. This result rests on two features of the model, which both are largely supported by empirical evidence. First, as shown under weak conditions, children’s human capital investments are positively affected by parents’ income. Second, the marginal propensity to save is increasing in income.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 955.

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Length: 50 pages
Date of creation: Dec 2003
Date of revision:
Publication status: published in: Journal of Macroeconomics, 2008, 30 (1), 19-42
Handle: RePEc:iza:izadps:dp955
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