Value of a privileged background

Abstract

This thesis considers how informational imperfections may give rise to advantages for those born to relatively rich parents. The first chapter focuses on the separation of some societies into different classes. Within the model, classes provide greater advantages to those from privileged backgrounds and, even in the absence of legal barriers preventing the lower classes from accessing skilled jobs, the skilled amongst them are still de facto denied access to high paying jobs through statistical discrimination. This chapter shows that there can be a net benefit from class discrimination, versus a classless state, when it creates information relating to the abilities of the upper class. This theme is expanded on in chapter two where a signalling model more explicitly describes the statistical discrimination suffered by some members of society. The advantage conferred on those from privileged backgrounds generates income dispersion, which in turn reinforces the advantages of the rich. If this feedback is strong enough, the model may exhibit multiplicity of steady states. This multiplicity of steady states is backward looking: the income dispersion today depends on the extent to which firms use the information available to them, which in turn depends on the income dispersion in the previous generation. The model of chapter two also demonstrates why societies with more "meritocratic" institutions may exhibit less intergenerational income mobility: the income dispersion that meritocracy creates increases the value of a privileged upbringing. The final chapter adds parental investment to the model. In doing so it brings the model more squarely in line with the statistical discrimination literature, although the model does not exhibit a multiplicity of equilibria. There is a unique optimal investment rule for parents. Exogenous shocks to meritocracy are again examined. Meritocracy increases income variance and hence, from behind the veil of ignorance, creates greater uncertainty over the income an individual will receive. The model describes how a risk averse person might prefer to be born into an economy where they expect to be poorer but avoid this increased uncertainty, and so despite raising incomes, meritocracy may make agents, on average, more unhappy.