Fearing the Worst: The Importance of Uncertainty for Inequality
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.
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- Reto FOELLMI & Rina ROSENBLATT-WISCH & Klaus REINER SCHENK-HOPPE, .
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Swiss Finance Institute Research Paper Series
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- Reto Foellmi & Rina Rosenblatt-Wisch & Klaus Reiner Schenk-Hoppé, 2010. "Consumption Paths under Prospect Utility in an Optimal Growth Model," Diskussionsschriften dp1010, Universitaet Bern, Departement Volkswirtschaft.
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"Loss Aversion in Aggregate Macroeconomic Time Series,"
2007-06, Swiss National Bank.
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- S. Rao Aiyagari, 1994.
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The Quarterly Journal of Economics,
Oxford University Press, vol. 109(3), pages 659-684.
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