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

Marcello D'Amato and Christian Di Pietro ()

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

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.

Keywords: Heterogeneous Ability; Borrowing Constraints; Intergenerational Mobility; Wealth Inequality; Occupational Choice; Educational Investment (search for similar items in EconPapers)
JEL-codes: D31 D91 I21 J24 O15 (search for similar items in EconPapers)
Date: 2011-12-05
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Published in The Journal of Economic Inequality, 2014, 12(1), 73-98

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