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Wealth inequality and externalities from ex ante skill heterogeneity

Konstantinos Angelopoulos, Spyridon Lazarakis and James Malley

Working Papers from Business School - Economics, University of Glasgow

Abstract: This paper develops an incomplete markets model with state de- pendent (Markovian) stochastic earnings processes and ex ante skill heterogeneity corresponding to being university educated or not . Us- ing the Wealth and Assets Survey for Great Britain, we Önd that the university educated group has higher average wealth, higher earn- ings risk but lower within group wealth inequality. Using estimates of the earnings processes for each group to calibrate the model, we Önd wealth inequality within and between the groups that is consistent with the data. Moreover, the predictions for overall wealth inequality are closer to the data, compared to the benchmark model with ex ante identical households. In this framework, ex ante skill heterogeneity generates a between-group pecuniary externality which in turn leads to the predicted di§erences in wealth inequality between the groups and works as an ampliÖcation mechanism to increase overall wealth inequality.

Keywords: incomplete markets; education di§erences; pecuniary externalities (search for similar items in EconPapers)
JEL-codes: E21 E25 H23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eur and nep-mac
Date: 2017-07
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