TY  - JOUR
AU  - Durlauf,Steven N.
TI  - A Theory of Persistent Income Inequality
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4056
PY  - 1992
Y2  - April 1992
UR  - http://www.nber.org/papers/w4056
L1  - http://www.nber.org/papers/w4056.pdf
N1  - Author contact info:
Steven N. Durlauf
Department of Economics
University of Wisconsin
1180 Observatory Drive
Madison, WI  53706-1393
Tel: 608/263-3859
Fax: 608/262-2033
E-Mail: sdurlauf@ssc.wisc.edu
AB  - This paper explores the dynamics of income inequality by studying the evolution of human capital investment and neighborhood choice for a population of families.  Parents affect the conditional probability distribution of their children's income through the choice of a neighborhood in which to live.  Neighborhood location affects children through two mechanisms.  First, the level of education depends on the total income of a neighborhood, as all school funding is determined by majority voting.  Human capital markets are incomplete as neighborhoods cannot borrow to supplement tax revenues available for education.  Second, the conditional probability distribution of individual-specific productivity shocks is affected by the income distribution within a neighborhood.  This dependence reflects cultural influences such as the presence in a community of successful role models. These forces interact to endogenously stratify the economy as families segregate themselves  into economically homogeneous neighborhoods.  Our model has two important features.  First, starting from identical initial conditions, families can exhibit different long term income levels, leading to persistent income inequality.  Second, areas of permanent poverty can emerge endogenously in a growing economy as neighborhood-wide feedback effects transmit poverty across generations.
ER  -