The Effect of Better Information on Income Inequality

Bernhard Eckwert and Itzhak Zilcha

No 969, CESifo Working Paper Series from CESifo

Abstract: We consider an OLG economy with endogenous investment in human capital. Heterogeneity in individual human capital levels is generated by random innate ability. The production of human capital depends on each individual’s investment in education. This investment decision is taken only after observing a signal which is correlated to his/her true ability, and which is used for updating beliefs. Thus, a better information system affects the distribution of human capital in each generation. Assuming separable and identical preferences for all individuals, we derive the following results in equilibrium: (a) If the relative measure of risk aversion is less (more) than 1 then more information raises (reduces) income inequality. (b) When a risk sharing market is available better information results in higher inequality regardsless of the measure risk aversion.

Keywords: information system; income inequality; risk sharing markets (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-mic
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Citations: View citations in EconPapers (4)

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Journal Article: The Effect of Better Information on Income Inequality (2007)
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