Shaping inequality
Abstract
This paper develops a model of human capital accumulation on the job in the presence of obsolescence risk. It fits well evidence of US income inequality both at the top and the bottom while remaining analytically tractable. The model is deployed to analytically characterize the equity vs. efficiency trade-offs of progressive income tax reforms showing how they depend crucially on the risk aversion of the social planner. We extend the model to an incomplete market setup solved numerically, in which individuals can both form precautionary savings and adjust their labor supply. In contrast to a model with exogenous income that suggests that tax progressivity in the US is too low, accounting for endogenous human capital accumulation would call for lower tax progressivity.
