Reparations and Persistent Racial Wealth Gaps

Job Boerma and Loukas Karabarbounis

No 776, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: Reparations is a policy proposal aiming to address the wealth gap between Black and White households. We provide a first formal analysis of the economics of reparations using a long-run model of heterogeneous dynasties with an occupational choice and bequests. Our innovation is to introduce endogenous dispersion of beliefs about risky returns, reflecting differences in dynasties' experiences with entrepreneurship over time. Feeding the exclusion of Black dynasties from labor and capital markets as driving force, the model quantitatively reproduces current and historical racial gaps in wealth, income, entrepreneurship, mobility, and beliefs about risky returns. We use the model to evaluate reparations and find that transfers eliminating the racial gap in average wealth today do not lead to wealth convergence in the long run. The logic is that century-long exclusions lead Black dynasties to enter into reparations with pessimistic beliefs about risky returns and to forego investment opportunities. We conclude by showing that entrepreneurial subsidies are more effective than wealth transfers in achieving racial wealth convergence in the long run.

Keywords: Reparations; Race gaps; Wealth; Entrepreneurship; Beliefs (search for similar items in EconPapers)
JEL-codes: D31 E21 J15 (search for similar items in EconPapers)
Pages: 44
Date: 2021-02-19
New Economics Papers: this item is included in nep-ent, nep-lab and nep-mac
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Reparations and Persistent Racial Wealth Gaps (2023)
Chapter: Reparations and Persistent Racial Wealth Gaps (2022)
Working Paper: Reparations and Persistent Racial Wealth Gaps (2022)
Working Paper: Reparations and Persistent Racial Wealth Gaps (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmwp:90186

DOI: 10.21034/wp.776

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