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Information and Inequality

Xiaowen Lei ()

Journal of Economic Theory, 2019, vol. 184, issue C

Abstract: This paper studies wealth inequality in a Blanchard/Yaari model with idiosyncratic investment returns. Its key innovation is to assume that individuals can buy information. Information reduces uncertainty about the unknown mean investment return. Reduced estimation risk encourages investment in higher yielding risky assets. As a result, endogenous information acquisition amplifies wealth inequality. Wealthy individuals buy more information, which leads them to invest a higher share of their wealth in higher yielding assets, which then makes them even wealthier. The model's empirical implications are studied using Monte Carlo simulations and perturbation approximations. An empirically plausible decrease in information costs can explain about two-thirds of the observed increase in the top 1% wealth share.

Keywords: Inequality; Information; Learning (search for similar items in EconPapers)
JEL-codes: D63 D82 D83 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.jet.2019.08.007

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