Income Inequality in a Job-Search Model with Heterogeneous Time Preferences

Abstract

This paper explores the use of an intertemporal job-search model in the investigation of within-cohort and between-cohort income inequality, the latter being generated by the heterogeneity of time preferences among cohorts of homogenous workers and the former by the cross-sectional turnover in the job market. It also o¤ers an alternative explanation for the empirically-documented negative correlation between time preference and labor income. Under some speci…c distributions regarding wage o¤ers and time preferences, we show how the within-cohort and between-cohort Gini coe¢ cients of income distribution can be calculated, and how they vary as a function of the parameters of the model. This work has been prepared during my 2004 visit to the Department of Economics of the University of Chicago. I am thankful to the Department for its hospitality and and to Professor Robert Lucas Jr. for the sponsorship of my visit. y This paper has bene…ted from comments of participants of seminars held at the Getulio Vargas Foundation, UFRJ and at the University of Chicago.