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Occupational Mobility and Wealth Evolution in a Simple Model of Educational Investment with Credit Market Imperfections

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Abstract

We consider a model of occupational choice with credit market imperfections and local non convexities in education investment. The implications of individual heterogeneity for the evolution of wealth distribution and policies are studied. Convergence of the wealth distribution is obtained whenever the (exogenous) distribution of education costs entails the presence inefficient types, regardless of how ”large” the support of the random ability parameter is. Conversely, poverty traps can emerge only if investment is efficient for every single agent in the economy. We explore conditions under which wealth accumulation eliminates the effects of financial market imperfection. Interestingly we show that, a necessary feature of steady states with occupational mobility is that wealth constraints, whenever they bind investment choices in the long run, they must bind for households in both occupations. Persistence of wealth constraints motivates our exploration of policies. Compared to the case of homogeneous ability, we show that heterogeneity requires more persistent policies to achieve similar results in terms of enhanced investment opportunities and income per capita. It is also shown that the scope for policies is larger under heterogeneity: policies can be effective in environments where they would fail in a world of homogeneous abilities.

Suggested Citation

  • Marcello D'Amato & Christian Di Pietro, 2011. "Occupational Mobility and Wealth Evolution in a Simple Model of Educational Investment with Credit Market Imperfections," CSEF Working Papers 300, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  • Handle: RePEc:sef:csefwp:300
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    References listed on IDEAS

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    More about this item

    Keywords

    Heterogeneous Ability; Borrowing Constraints; Intergenerational Mobility; Wealth Inequality; Occupational Choice; Educational Investment;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • I21 - Health, Education, and Welfare - - Education - - - Analysis of Education
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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