Persistent inequality with endogenous rate of time preference

Abstract

Purpose

The purpose of this paper is to provide a theory that can explain the persistence of inequality in an economy where household agents are identical in terms of their preferences and have access to the same production technology.

Design/methodology/approach

An overlapping generations model is developed where agents are imperfectly altruistic and face uncertain lifetimes. The rate of time preference of an agent depends on her probability of survival which is increasing in her level of consumption. An agent's initial endowment of human capital jointly determines her patience and willingness to accumulate human capital and other productive assets.

Findings

It was found that inequality may persist in the economy as a result of endogenous rate of time preference. Agents with low initial endowment of human capital are impatient and choose not to invest in human capital. Agents with initial endowment of human capital above a certain threshold choose to invest in human capital as they expect to survive long enough to reap the benefits of their investment.

Originality/value

This paper add to the present literature by providing an alternative mechanism to explain the persistence of inequality. In future research this model framework can be used to evaluate the impact of alternative government and tax policies on the long run distributions of income and wealth.

Citation

Chakrabarty, D. (2008), "Persistent inequality with endogenous rate of time preference", Indian Growth and Development Review, Vol. 1 No. 2, pp. 193-211. https://doi.org/10.1108/17538250810903783