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Wealth inequality and externalities from ex ante skill heterogeneity

Author

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  • Konstantinos Angelopoulos
  • Spyridon Lazarakis
  • James Malley

Abstract

This paper develops an incomplete markets model with state de- pendent (Markovian) stochastic earnings processes and ex ante skill heterogeneity corresponding to being university educated or not . Us- ing the Wealth and Assets Survey for Great Britain, we Önd that the university educated group has higher average wealth, higher earn- ings risk but lower within group wealth inequality. Using estimates of the earnings processes for each group to calibrate the model, we Önd wealth inequality within and between the groups that is consistent with the data. Moreover, the predictions for overall wealth inequality are closer to the data, compared to the benchmark model with ex ante identical households. In this framework, ex ante skill heterogeneity generates a between-group pecuniary externality which in turn leads to the predicted di§erences in wealth inequality between the groups and works as an ampliÖcation mechanism to increase overall wealth inequality.

Suggested Citation

  • Konstantinos Angelopoulos & Spyridon Lazarakis & James Malley, 2017. "Wealth inequality and externalities from ex ante skill heterogeneity," Working Papers 2017_07, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2017_07
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    More about this item

    Keywords

    incomplete markets; education di§erences; pecuniary externalities;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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