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
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S002205311830317X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:184:y:2019:i:c:s002205311830317x

DOI: 10.1016/j.jet.2019.08.007

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().