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A Theory of Persistent Income Inequality

  • Steven N. Durlauf

This paper explores the dynamics of income inequality by studying the evolution of human capital investment and neighborhood choice for a population of families. Parents affect the conditional probability distribution of their children's income through the choice of a neighborhood in which to live. Neighborhood location affects children through two mechanisms. First, the level of education depends on the total income of a neighborhood, as all school funding is determined by majority voting. Human capital markets are incomplete as neighborhoods cannot borrow to supplement tax revenues available for education. Second, the conditional probability distribution of individual-specific productivity shocks is affected by the income distribution within a neighborhood. This dependence reflects cultural influences such as the presence in a community of successful role models. These forces interact to endogenously stratify the economy as families segregate themselves into economically homogeneous neighborhoods. Our model has two important features. First, starting from identical initial conditions, families can exhibit different long term income levels, leading to persistent income inequality. Second, areas of permanent poverty can emerge endogenously in a growing economy as neighborhood-wide feedback effects transmit poverty across generations.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4056.

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Date of creation: Apr 1992
Date of revision:
Publication status: published as Journal of Economics Growth, Vol. 1, no. 1 (March 1996): 75-93.
Handle: RePEc:nbr:nberwo:4056
Note: EFG
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  1. Mary Jo Bane & David T. Ellwood, 1986. "Slipping into and out of Poverty: The Dynamics of Spells," Journal of Human Resources, University of Wisconsin Press, vol. 21(1), pages 1-23.
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  9. Loury, Glenn C, 1981. "Intergenerational Transfers and the Distribution of Earnings," Econometrica, Econometric Society, vol. 49(4), pages 843-67, June.
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  12. Durlauf, Steven N, 1993. "Nonergodic Economic Growth," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 349-66, April.
  13. Becker, Gary S & Tomes, Nigel, 1979. "An Equilibrium Theory of the Distribution of Income and Intergenerational Mobility," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1153-89, December.
  14. Banerjee, Abhijit V & Newman, Andrew F, 1991. "Risk-Bearing and the Theory of Income Distribution," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 211-35, April.
  15. Mary Corcoran & Roger H. Gordon & Deborah Laren & Gary Solon, 1989. "Effects of Family and Community Background on Men's Economic Status," NBER Working Papers 2896, National Bureau of Economic Research, Inc.
  16. Card, David & Krueger, Alan B, 1992. "Does School Quality Matter? Returns to Education and the Characteristics of Public Schools in the United States," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 1-40, February.
  17. Solon, Gary, 1992. "Intergenerational Income Mobility in the United States," American Economic Review, American Economic Association, vol. 82(3), pages 393-408, June.
  18. Roberts, Kevin W. S., 1977. "Voting over income tax schedules," Journal of Public Economics, Elsevier, vol. 8(3), pages 329-340, December.
  19. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
  20. Glomm, Gerhard & Ravikumar, B, 1992. "Public versus Private Investment in Human Capital Endogenous Growth and Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 818-34, August.
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