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An adjustment cost model of distributional dynamics

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  • Yoseph Yilma Getachew

    (Durham Business School)

  • Parantap Basu

    (Durham Business School)

Abstract

We analyze the distributional e¤ects of adjustment cost in an environment with incomplete capital market. We find that a higher adjustment cost for human capital acquisition slows down the intergenerational mobility and results in a persistent inequality across generations. A low depreciation cost of human capital contributes to longer life of the capital which could elevate this adjustment cost and hence contribute to this inequality persistence. A lower total factor productivity could hurt poor with a higher marginal product when human capital has low depreciation. This could add to the slowing of intergenerational mobility when adjustment cost is present. The quantitative analysis of our model suggests that the human capital adjustment cost is nontrivial to reproduce the observed persistence of inequality.

Suggested Citation

  • Yoseph Yilma Getachew & Parantap Basu, 2012. "An adjustment cost model of distributional dynamics," Department of Economics Working Papers 2012_08, Durham University, Department of Economics.
    • Handle: RePEc:dur:durham:2012_08
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    Keywords

    Intergenerational mobility; inequality persistence; adjustment cost of capital;
    All these keywords.

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