An adjustment cost model of social mobility

Basu, P.; Getachew, Y.

Abstract

We analyze herein the effects of the human capital adjustment cost on social mobility. Such an adjustment cost is modeled as a rising marginal cost schedule for augmenting human capital. We use a general human capital technology, which disentangles the adjustment cost from the depreciation cost of the human capital. Missing credit markets prevent individuals from equalizing the initial differences in the human capital. We find that a higher adjustment cost for human capital acquisition slows down the social mobility and results in a persistent inequality across generations. On the other hand, a higher rate of human capital depreciation could increase mobility via a positive effect on new investment. The quantitative analysis of our model suggests that the human capital adjustment cost is nontrivial to account for the observed persistence of inequality and social mobility. In addition, we find that the government redistribution policy could account for the large observed variation in estimates of social mobility.

Citation

Basu, P., & Getachew, Y. (2015). An adjustment cost model of social mobility. Journal of Macroeconomics, 44, 177-190. https://doi.org/10.1016/j.jmacro.2015.02.008

• Journal Article Type: Article
• Acceptance Date: Feb 16, 2015
• Online Publication Date: Mar 5, 2015
• Publication Date: Jun 1, 2015
• Deposit Date: Feb 20, 2015
• Publicly Available Date: Mar 5, 2016
• Journal: Journal of Macroeconomics
• Print ISSN: 0164-0704
• Electronic ISSN: 1873-152X
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 44
• Pages: 177-190
• DOI: https://doi.org/10.1016/j.jmacro.2015.02.008
• Keywords: Adjustment cost of capital, Inequality persistence, Intergenerational mobility.
• Public URL: https://durham-repository.worktribe.com/output/1445246