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Fearing the worst : the importance of uncertainty for inequality.

Blackburn, K. and Chivers, D. (2015) 'Fearing the worst : the importance of uncertainty for inequality.', Economic theory., 60 (2). pp. 345-370.

Abstract

We present an overlapping generations model in which aspirational agents face uncertainty about the returns to human capital investment. This uncertainty implies the prospect that aspirations will not be fulfilled, the probability of which is greater the lower is 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 credit market imperfections, though they may appear as if they do.

Item Type:Article
Keywords:Inequality, Uncertainty, Aspirations, Loss aversion, D31, D81, E24.
Full text:(AM) Accepted Manuscript
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Status:Peer-reviewed
Publisher Web site:http://dx.doi.org/10.1007/s00199-015-0876-9
Publisher statement:The final publication is available at Springer via http://dx.doi.org/10.1007/s00199-015-0876-9
Record Created:28 Sep 2015 11:05
Last Modified:10 Apr 2016 00:35

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