Cabrillana, Ana Hidalgo: Intergenerational Mobility, Random Earnings and Imperfect Capital Markets
World Conference Econometric Society, 2000, Seattle

Ana Hidalgo Cabrillana, Universitat Autonoma de Barcelona
Intergenerational Mobility, Random Earnings and Imperfect Capital Markets
Session: C-6-9  Sunday 13 August 2000  by Cabrillana, Ana Hidalgo
In this paper we study intergenerational moblility in an economy where individuals are altruistic, have lifetime earnings depending on random draws, and choose to invest in education. The agents could apply for a loan in the capital market to make human capital investment. However, we will assume that capital markets are imperfecto, so that the borrowing rate and the lending rate are different. Individuals may differ in their initial wealth as well as in their ability, to that mobility is a result of individuals´choices, given their ex -ante heterogeneity. Initially, poor agents choose to work as uneducated leaving a small transfer, while wealthy agents become educated wokers and give a greater one. Nevertheless, individuals can react to incentives as financial debt, innate abilites or wage gap, so that they invest in human capital and wok as educated. It is shown that in an economy with a high degreee of imperfection in the capital market, downward mobility is always possible, raises inequality and output levels are lower because ability is not efficiently allocated. Conversely, when the financial market is more perfect, mobility increases, inequality decreases and the allocation of education is positively correlated with indiviudals´abilities. As a result, this economy performs a higher output level because o this quality-adjusted labor imputs.

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