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Educational Signaling, Credit Constraints and Inequality Dynamics

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Abstract

We present a dynamic OLG model of educational signaling, inequality and mobility with missing credit markets. Agents are characterized by two sources of unobserved heterogeneity: ability and parental income, consistent with empirical evidence on returns to schooling. Both quantity and quality of human capital evolve endogenously. The model generates a Kuznets inverted-U pattern in skill premia similar to historical US and UK experience. In the first (resp. later) phase the skill premium rises (falls), social returns to education exceed (falls below) private returns: under-investment owing to financial imperfections dominate (are dominated by) over-investment owing to signaling distortions. There always exist Pareto-improving policy interventions reallocating education between poor and rich children. JEL Classification:

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  • Marcello D'Amato & Dilip Mookherjee, 2012. "Educational Signaling, Credit Constraints and Inequality Dynamics," CSEF Working Papers 311, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:311
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    Cited by:

    1. Masashi Tanaka, 2020. "Human capital investment, credentialing, and wage differentials," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(4), pages 992-1016, August.
    2. By Vincenzo Carrieri & Marcello D’Amato & Roberto Zotti, 2015. "On the causal effects of selective admission policies on students’ performances: evidence from a quasi-experiment in a large Italian university," Oxford Economic Papers, Oxford University Press, vol. 67(4), pages 1034-1056.
    3. IOVINO, Giorgia, 2017. "The Mezzogiorno Problem to be. Territorial Implications of the Reform of Tertiary Education in Italy," CELPE Discussion Papers 147, CELPE - CEnter for Labor and Political Economics, University of Salerno, Italy.
    4. Kristinn Hermannsson & Katerina Lisenkova & Patrizio Lecca & J Kim Swales & Peter G McGregor, 2014. "The Regional Economic Impact of More Graduates in the Labour Market: A ‘Micro-to-Macro’ Analysis for Scotland," Environment and Planning A, , vol. 46(2), pages 471-487, February.

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