Fearing the worst: the importance of uncertainty for inequality

Abstract

2015) 'Fearing the worst : the importance of uncertainty for inequality.', Economic theory., 60 (2). pp. 345-370. Further information on publisher's website:http://dx.doi.org/10.1007/s00199-015-0876-9Publisher's copyright statement:The nal publication is available at Springer via http://dx.doi.org/10.1007/s00199-015-0876-9Additional information: Use policyThe full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that:• a full bibliographic reference is made to the original source • a link is made to the metadata record in DRO • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders.Please consult the full DRO policy for further details. 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 ful…lled, the probability of which is greater the lower is the human capital endowment of an agent. We show that agents with su¢ ciently low human capital endowments may experience such a strong in ‡uence 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.JEL Classi…cation: D31, D81, E24.

Variations in Employee Performance in Response to Organizational Justice: The Sensitizing Effect of Socioeconomic Conditions

“…Uncertainty discourages individuals at the lower end of the income distribution from making profitable investments—in particular, investments in their own human capital (Grossman, 2008; Krebs, 2003)—which would have the capacity to lift them out of their economic plight. In contrast, individuals at the higher end of the income distribution are more able to make such high-risk/high-return investments, leading to a widening of the gap between rich and poor (Blackburn & Chivers, 2015). In sum, inequality and uncertainty are mutually related.…”

Success, survive or escape? Aspirations and poverty traps

“…This is not to say that credit market imperfections are unimportant as it is likely that both aspirations and liquidity constraints will ultimately have a role in the creation of poverty traps. In fact, adding a liquidity constraint to this model turns out to be isomorphic to the addition of an aspiration level within the utility function (see Blackburn and Chivers, 2015). This result highlights why it is di¢ cult to distinguish between behavioural e¤ects and credit frictions empirically (see Carroll, 2001).…”

“…As a result, aspiration failure will be self-fulling. Blackburn and Chivers (2015) show how the e¤ects of aspirationally-induced loss aversion can result in persistent inequality due to the fear or falling below a certain level of income. However, all of these models treat aspirations as unidirectional: either success (as in Genicot andRay, 2017 andDalton et al, 2016) or survival (as in Blackburn and Chivers, 2015).…”

“…It is trivial to show what happens when > 0 : Adding this to the model simply strengthens the e¤ects of aspirations (seeBlackburn and Chivers, 2015).…”