An adjustment cost model of distributional dynamics.

Abstract

We analyze the distributional e¤ects of adjustment cost in an environment with incompletecapital market. We find that a higher adjustment cost for human capital acquisitionslows down the intergenerational mobility and results in a persistent inequality across generations. Alow depreciation cost of human capital contributes to longer life of the capitalwhich could elevate this adjustment cost and hence contribute to this inequality persistence. Alower total factor productivity could hurt poor with a higher marginal productwhen human capital has low depreciation. This could add to the slowing of intergenerational mobility when adjustment cost is present. The quantitative analysis of our modelsuggests that the human capital adjustment cost is nontrivial to reproduce the observedpersistence of inequality.