Endogenous Selection of Comparison Groups, Human Capital Formation, and Tax Policy
Version of Record online: 22 DEC 2010
© 2010 The London School of Economics and Political Science
Volume 79, Issue 313, pages 62–75, January 2012
How to Cite
STARK, O., HYLL, W. and WANG, Y. (2012), Endogenous Selection of Comparison Groups, Human Capital Formation, and Tax Policy. Economica, 79: 62–75. doi: 10.1111/j.1468-0335.2010.00876.x
- Issue online: 13 DEC 2011
- Version of Record online: 22 DEC 2010
- Final version received 30 September 2010.
We consider a setting in which the acquisition of human capital entails a change of location in social space that causes individuals to revise their comparison groups. Skill levels are viewed as occupational groups. Moving up the skill ladder by acquiring additional human capital, in itself rewarding, leads to a shift in the individual's inclination to compare himself with a different, and on average better-paid, comparison group, in itself penalizing. We shed new light on the dynamics of human capital formation, and suggest novel policy interventions to encourage human capital formation in the aggregate and reduce inter-group income inequality.