I want to thank the anonymous referees, the associate editor, and the editor of this Journal for the outstanding job they did to improve this paper. I am grateful to H. d’Albis, A. d’Autume, P. Cahu, D. de la Croix, E. H. Fall, J.-O. Hairault, Y. Phillips, T. Piketty, J.-V. Ríos-Rull, and B. Wigniolle for helpful suggestions and seminar participants at PSE-Jourdan, EUREQua, GREQAM, T2M, EALE/SOLE conference, PET 05, CORE and Vigo X Dynamic Macroeconomics Workshop for their comments. The usual disclaimer applies.
Endogenous Persistent Occupations and Inequality
Article first published online: 12 MAR 2013
© 2013 Wiley Periodicals, Inc.
Journal of Public Economic Theory
Volume 15, Issue 2, pages 292–318, April 2013
How to Cite
FALL, F. (2013), Endogenous Persistent Occupations and Inequality. Journal of Public Economic Theory, 15: 292–318. doi: 10.1111/jpet.12019
- Issue published online: 12 MAR 2013
- Article first published online: 12 MAR 2013
- Received April 22, 2008; Accepted May 12, 2011.
The paper argues that human capital is the leading force determining inequality persistence. We show that, in a context of a perfect capital market where agents inherit human capital and wealth, it is the inherited human capital level that determines agents' occupational choice and investment. The critical assumption is that the entrepreneurial activity is of increasing returns to scale. This creates a higher profile of revenue for entrepreneurs. Although every agent can choose to become an entrepreneur, and although there is no barrier of entry in entrepreneurship, only those who receive a relatively higher human capital will do so. Agents whose inherited human capital is lower than the human capital threshold, endogenously determined, are better off becoming workers. Even in the context of a perfect capital market, which allows less endowed agents to borrow and invest in education, it turns out that the agents who inherit a low level of human capital bear a greater utility cost in their education investment. So they are better off investing less in education, lending their savings, and working as workers. As a result, agents' occupational choice depends on the intergenerational transmission of human capital. In the long run, the population is polarized into the rich entrepreneurs and the poor workers, magnifying inequality persistence in human capital level and revenue.