Sources of Lifetime Inequality

Mark Huggett, Gustavo Ventura and Amir Yaron

No 13224, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Is lifetime inequality mainly due to differences across people established early in life or to differences in luck experienced over the working lifetime? We answer this question within a model that features idiosyncratic shocks to human capital, estimated directly from data, as well as heterogeneity in ability to learn, initial human capital, and initial wealth -- features which are chosen to match observed properties of earnings dynamics by cohorts. We find that as of age 20, differences in initial conditions account for more of the variation in lifetime utility, lifetime earnings and lifetime wealth than do differences in shocks received over the lifetime. Among initial conditions, variation in initial human capital is substantially more important than variation in learning ability or initial wealth for determining how an agent fares in life. An increase in an agent's human capital affects expected lifetime utility by raising an agent's expected earnings profile, whereas an increase in learning ability affects expected utility by producing a steeper expected earnings profile.

JEL-codes: D31 D91 E21 (search for similar items in EconPapers)
Date: 2007-07
New Economics Papers: this item is included in nep-dge, nep-hrm and nep-upt
Note: EFG
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Citations: View citations in EconPapers (36)

Published as Mark Huggett & Gustavo Ventura & Amir Yaron, 2011. "Sources of Lifetime Inequality," American Economic Review, American Economic Association, vol. 101(7), pages 2923-54, December.

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Related works:
Journal Article: Sources of Lifetime Inequality (2011)
Working Paper: Sources of Lifetime Inequality (2010)
Working Paper: Sources of Lifetime Inequality (2007)
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