Essays on Inequality and Intergenerational Mobility.

Abstract

In this thesis I study how inequalities emerge and persist. Inequality has risen within the_x000D_ developed world over the past decades. However, I do not only focus on the inequality of_x000D_ outcomes, but particularly on the inequality of opportunity. A large part of income inequalities is_x000D_ the consequence of unequal educational outcomes. Therefore, it is important to understand at_x000D_ which educational stages the gaps are widened and why access to education might differ for_x000D_ different segments of the population. Many ethnicities and social groups are characterized by_x000D_ persistently low socio-economic indicators compared to the rest of the population. Therefore, it is_x000D_ also essential to ask whether education alone can level the playing field or whether discrimination_x000D_ might be an important explanatory factor as well._x000D_ In the first chapter, I investigate why high earnings inequality goes hand in hand with low_x000D_ intergenerational earnings mobility across developed countries. I study this relationship in a_x000D_ dynastic overlapping generations model, in which a parent can invest in the early education of his_x000D_ child and decides whether to send the child to college. An increase in the college premium_x000D_ translates into increased incentives to invest in early education because of assumed dynamic_x000D_ complementarities between early and tertiary education. Public education could mitigate the_x000D_ relationship between inequality and intergenerational mobility. However, public expenditure on_x000D_ education is negatively correlated with inequality. I replicate this cross-country relationship by_x000D_ endogenizing education policies via probabilistic voting, while accounting for biases in voter_x000D_ turnout towards the educated. The model is calibrated to the US as the benchmark economy,_x000D_ which exhibits high inequality and low mobility. Experiments comparing the US to other OECD_x000D_ countries demonstrate that tertiary education characteristics can account for two-thirds of the_x000D_ differences in inequality. Patterns of voter turnout across countries explain nearly one-quarter of_x000D_ the differences in inequality and mobility. A counterfactual exercise for the US suggests that_x000D_ compulsory voting could foster intergenerational mobility, whereas the effect on pre-tax inequality_x000D_ is comparably low._x000D_ In the second chapter, I study why intergenerational earnings mobility is lower in countries_x000D_ where females are less likely to work and public preschool expenditures are lower. When fewer_x000D_ females are working more mothers are at home with their children providing a direct channel of_x000D_ transmission of abilities. In order to account for cross-country differences in earnings persistence_x000D_ through differences in public preschool expenditures, a dynastic overlapping generations model is_x000D_ calibrated to the US. I find that differences in public preschool expenditures on average account_x000D_ for 17% of the differences in earnings persistence between the US and 15 OECD countries and_x000D_ can explain 22% of the variation._x000D_ In the third chapter, joint with Rajesh Ramachandran, we present a model where the_x000D_ collective memory of past discrimination can cause coordination failures leading to present_x000D_ discrimination. The presented type of discrimination can arise for activities characterized by_x000D_ interlinkages, which require the input of more than one individual for the production process to be_x000D_ carried out. The model shows how discrimination can persist forever under perfectly observable_x000D_ ability, when taste for discrimination has died out, individual ability is ex-ante and ex-post_x000D_ identical, and in the absence of discriminatory social norms. Agents without a preference for_x000D_ discrimination rationally discriminate in equilibrium driven by the belief about discriminatory_x000D_ actions by others. The model predicts lower participation rates and higher costs of establishing_x000D_ interlinkages for the discriminated group in equilibrium. Empirically, we analyze differences_x000D_ between blacks and whites in terms of self-employment in the US finding that blacks have lower_x000D_ participation rates and that beliefs about discrimination are a significant factor in explaining lower_x000D_ self-employment rates of blacks in the US.

Date of Award	18 Jun 2014
Original language	English
Supervisor	Nezih Guner (Director)