Sources of Lifetime Inequality

41 Pages Posted: 3 Jul 2007 Last revised: 19 Feb 2021

See all articles by Mark Huggett

Mark Huggett

Georgetown University - Department of Economics

Gustavo Jaime Ventura

Pennsylvania State University, College of the Liberal Arts - Department of Economic

Amir Yaron

University of Pennsylvania -- Wharton School of Business; National Bureau of Economic Research (NBER)

Date Written: July 2007

Abstract

Is lifetime inequality mainly due to differences across people established early in life or to differences in luck experienced over the working lifetime? We answer this question within a model that features idiosyncratic shocks to human capital, estimated directly from data, as well as heterogeneity in ability to learn, initial human capital, and initial wealth -- features which are chosen to match observed properties of earnings dynamics by cohorts. We find that as of age 20, differences in initial conditions account for more of the variation in lifetime utility, lifetime earnings and lifetime wealth than do differences in shocks received over the lifetime. Among initial conditions, variation in initial human capital is substantially more important than variation in learning ability or initial wealth for determining how an agent fares in life. An increase in an agent's human capital affects expected lifetime utility by raising an agent's expected earnings profile, whereas an increase in learning ability affects expected utility by producing a steeper expected earnings profile.

Suggested Citation

Huggett, Mark and Ventura, Gustavo Jaime and Yaron, Amir, Sources of Lifetime Inequality (July 2007). NBER Working Paper No. w13224, Available at SSRN: https://ssrn.com/abstract=998007

Mark Huggett

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States
202-687-6683 (Phone)

Gustavo Jaime Ventura

Pennsylvania State University, College of the Liberal Arts - Department of Economic ( email )

601 Kern Building
University Park, PA 16802-3306
United States

Amir Yaron (Contact Author)

University of Pennsylvania -- Wharton School of Business ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-1241 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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