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Fearing the worst: the importance of uncertainty for inequality

Blackburn, K.; Chivers, D.

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Authors

K. Blackburn



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.

Citation

Blackburn, K., & Chivers, D. (2015). Fearing the worst: the importance of uncertainty for inequality. Economic Theory, 60(2), 345-370. https://doi.org/10.1007/s00199-015-0876-9

Journal Article Type Article
Acceptance Date Mar 31, 2015
Online Publication Date Apr 9, 2015
Publication Date Oct 1, 2015
Deposit Date Sep 23, 2015
Publicly Available Date Mar 29, 2024
Journal Economic Theory
Print ISSN 0938-2259
Electronic ISSN 1432-0479
Publisher Springer
Peer Reviewed Peer Reviewed
Volume 60
Issue 2
Pages 345-370
DOI https://doi.org/10.1007/s00199-015-0876-9
Keywords Inequality, Uncertainty, Aspirations, Loss aversion, D31, D81, E24.
Public URL https://durham-repository.worktribe.com/output/1402247

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