Intergenerational human capital,risk aversion, and the poverty trap

Chau Pham
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Chau Pham: University of Warwick

Warwick-Monash Economics Student Papers from Warwick Monash Economics Student Papers

Abstract: This paper addresses two issues : the under investment in education and the poverty trap that ensues for poor households. In a setting where the end outcome is binary, an investing agent faces two levels of risk, one in the intermediate outcome - how muchhuman capital she obtains for a given amount of investment, and one inherent in theend outcome - whether she gets the high-paid job. We show that when human capital is inheritable, risk-averse agents are deterred from investing because their parentsare not sufficiently educated. Moreover, the U-shaped expected utility means theoptimal investment occurs at either corners. If this investment or underinvestment is sustained through generations, a separating equilibrium such that poor households do not invest while wealthier ones do emerges. The divergence in educational attainment translates into a divergence in wealth between those who invest and those who do not.A simple calibration employing data from the NLSY97 demonstrates the existence of these equilibria at different levels of risk-aversion.

Keywords: intergenerational human capital; poverty trap; risk-aversion; underinvestment JEL Classification: I32; I24; C60 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-cwa, nep-fdg, nep-hrm and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:wrkesp:28

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