Boğaziçi University Department of Economics Seminar

11/10/2019 15:00

"Estimating a dynamic model with unequal opportunities"

Abstract: This study analyzes an OLG model where the ability and the initial wealth of children are determined by their parents’ income. The model involves schooling choice, labor supply, on-the-job training, and R&D. We estimate the model with longitudinal US data from 1997 to 2015. The results surprisingly suggest that middle income children have higher initial abilities on average but rich children go to better colleges. Superior colleges - despite inferior abilities - are accessible for the rich because more resource is spent on the rich kids’ college education. So, in the sense of allocative efficiency, there is an over-investment in rich children’s education and under-investment in middle income children’s education. Our numerical analysis shows that the standard progressive income tax/transfer schemes, again surprisingly, have detrimental effects. But redistributive policies that compensate for poor parental background increase (a) college enrollment, (b) innovation in production technology, and (c) the middle class.