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Fearing the Worst: The Importance of Uncertainty for Inequality

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  • Keith Blackburn
  • David Chivers

Abstract

We present an overlapping generations model in which aspirationalagents face uncertainty about the returns to human capital. Investment in human capital requires external funding, implying a probability of bankruptcy that is greater the lower the human capital endowment of an agent. We show that agents with sufficiently low human capital endowments may experience such a strong influence of loss aversion that they abstain from human capital investment. We further show how this behaviour may be transmitted through successive generations to cause initial inequalities to persist. These results do not rely on any capital market imperfections.

Suggested Citation

  • Keith Blackburn & David Chivers, 2013. "Fearing the Worst: The Importance of Uncertainty for Inequality," Centre for Growth and Business Cycle Research Discussion Paper Series 182, Economics, The University of Manchester.
    • Handle: RePEc:man:cgbcrp:182
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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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