The Effect of Better Information on Income Inequality |
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Authors: | Bernhard Eckwert Itzhak Zilcha |
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Institution: | (1) Bielefeld University, 33501 Bielefeld, Germany;(2) The Eitan Berglas School of Economics and CESifo, Tel Aviv University, Tel Aviv, Israel |
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Abstract: | We consider an OLG economy with endogenous investment in human capital. Heterogeneity in individual human capital levels is
modelled by a distribution of innate ability across agents. This distribution is common knowledge but, at young age, no agent
knows his/her ability. The production of human capital depends on each individual’s investment in education. This investment
decision is taken only after observing a signal which is correlated to his/her true ability, and which is used for updating
beliefs. Thus, a better information system affects the distribution of human capital in each generation. Assuming separable
and identical preferences for all individuals, we derive the following results in equilibrium: (a) If the relative measure
of risk aversion is less (more) than 1 then more information raises (reduces) income inequality. (b) When a risk sharing market
is available better information results in higher inequality regardless of the measure risk aversion.
We are grateful to Alex Cukierman, Zvi Eckstein, Yona Rubinstein and Daniel Tsiddon. An anonymous referee made extremely useful
comments and suggestions. Financial support from the German-Israeli Foundation for Scientific Research and Development (GIF)
is gratefully acknowledged. |
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Keywords: | Information system Income inequality Risk sharing markets |
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