Educational Opportunity and Income Inequality

Igal Hendel, Paul Willen and Joel Shapiro

No 89, Working Papers from Barcelona School of Economics

Abstract: Since World War II, the United States government has made improved access to higher education a priority. This effort has substantially increased the number of people who complete college – generally thought to be a good thing. We show, however, that such policies can actually increase income inequality. The mechanism that drives our results is the "signaling" role of education first explored by Spence (1973). We focus on government policies that reduce the effective interest rate on borrowing for education. When borrowing for education is difficult, lack of a college education could mean that one is either of low ability or high ability but has low financial resources. Wages and income reflect the presence of high ability individuals in the uneducated pool. When government programs make borrowing easier, high ability types get educated and leave the uneducated pool. We demonstrate our argument by solving for the relationship between the effective interest rate and income inequality in the steady state of a dynamic asymmetric information model.

Keywords: Education signalling; college premium; college loans (search for similar items in EconPapers)
JEL-codes: D82 I22 I28 J31 (search for similar items in EconPapers)
Date: 2015-09
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Related works:
Journal Article: Educational opportunity and income inequality (2005)
Working Paper: Educational opportunity and income inequality (2004)
Working Paper: Educational Opportunity and Income Inequality (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:89

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