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An Assignment Model of Knowledge Diffusion and Income Inequality

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  • Erzo G. J. Luttmer

Abstract

Randomness in individual discovery disperses productivities, whereas learning from others keeps productivities together. Long-run growth and persistent earnings inequality emerge when these two mechanisms for knowledge accumulation are combined. This paper considers an economy in which those with more useful knowledge can teach others, with competitive markets assigning students to teachers. In equilibrium, students with an ability to learn quickly are assigned to teachers with the most productive knowledge. This sorting on ability implies large differences in earnings distributions conditional on ability, as shown using explicit formulas for the tail behavior of these distributions.

Suggested Citation

  • Erzo G. J. Luttmer, 2015. "An Assignment Model of Knowledge Diffusion and Income Inequality," Staff Report 509, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:509
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    Cited by:

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    2. Kyle Herkenhoff & Jeremy Lise & Guido Menzio & Gordon M. Phillips, 2018. "Production and Learning in Teams," NBER Working Papers 25179, National Bureau of Economic Research, Inc.
    3. Staley, Mark, 2015. "Firm Growth and Selection in a Finite Economy," MPRA Paper 67291, University Library of Munich, Germany.
    4. Artige, Lionel & Cavenaile, Laurent, 2023. "Public education expenditures, growth and income inequality," Journal of Economic Theory, Elsevier, vol. 209(C).

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    More about this item

    Keywords

    Knowledge diffusion; Growth; Income inequality;
    All these keywords.

    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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