Fearing the worst: the importance of uncertainty for inequality

Keith Blackburn and David Chivers

Economic Theory, 2015, vol. 60, issue 2, 345-370

Abstract: We present an overlapping generations model in which aspirational agents face uncertainty about the returns to human capital investment. This uncertainty implies the prospect that aspirations will not be fulfilled, the probability of which is greater the lower is the human capital endowment of an agent. We show that agents with sufficiently low human capital endowments may experience such a strong influence of loss aversion that they abstain from human capital investment. We further show how this behaviour may be transmitted through successive generations to cause initial inequalities to persist. These results do not rely on any credit market imperfections, though they may appear as if they do. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Inequality; Uncertainty; Aspirations; Loss aversion; D31; D81; E24 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (4)

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Working Paper: Fearing the Worst: The Importance of Uncertainty for Inequality (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:spr:joecth:v:60:y:2015:i:2:p:345-370

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DOI: 10.1007/s00199-015-0876-9

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