PHYSICAL AND HUMAN CAPITAL ACCUMULATION AND THE EVOLUTION OF INCOME AND INEQUALITY

We study how financial and educational institutions affect the evolution of income and income inequality in an overlapping generations model with heterogenous agents. While the literature mostly focuses on either physical or human capital, we make an attempt to study the joint evolution of these variables. In our model, we find that better educational institutions increase income of the individuals and are associated with lower income inequality. Better financial institutions also foster economic growth, but are associated with higher income inequality. Our model also demonstrates that focusing on aggregate measures of financial and educational institutions provides misleading results if one neglects the possibility of unequal access to these institutions.