Fearing the Worst: The Importance of Uncertainty for Inequality

Keith Blackburn and David Chivers

Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The University of Manchester

Abstract: We present an overlapping generations model in which aspirationalagents face uncertainty about the returns to human capital. Investment in human capital requires external funding, implying a probability of bankruptcy that is greater the lower 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 capital market imperfections.

Pages: 30 pages
Date: 2013
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Journal Article: Fearing the worst: the importance of uncertainty for inequality (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:man:cgbcrp:182

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