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Osaka University

By Koichi Futagami and Shingo Ishiguro

Abstract

This paper presents a contractual framework to investigate the dynamic relation between income inequality and occupational choice in an overlapping generations model. Depending on the natures of equilibrium loan contracts, ex ante expected utilities (or average lifetime incomes) of different occupations in economy are not equal and such inequality persists in the long run. This result is, in contrast to existing literature, derived without intergenerational linkage of wealth and heterogeneities among individuals. We also examine the dynamical patterns of how income inequality tends to decrease or increase over time and identify the set of parameter values under which there exist multiple steady states, some of which experience income inequality but others do not. Finally welfare comparison among different steady states shows that the steady state with income inequality may attain lower welfare than that without it

Topics: Financial Contracts, Income Inequality, Moral Hazard, Occupational Choice, Overlapping Generations We are grateful to Hideshi Itoh, Michihiro Kandori, Yasuo Maeda, Akihisa Shibata
Year: 2004
OAI identifier: oai:CiteSeerX.psu:10.1.1.194.8375
Provided by: CiteSeerX
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