Essays on educational investment, income inequality and income mobility

Abstract

The first two pieces of work in this thesis look into the strategic decision of intergenerational educational investment and its implication to income inequality, skill distribution and income mobility. The contribution of my work is to incorporate matching frictions into the marriage market and analyze returns from strategic educational investments. The mechanism in the marriage market adopted follows the spirit of the competitive search model which interprets the ‘mismatch’ phenomenon as the result of coordination frictions in the matching process. The competitiveness and frictions in the family formation process create decreasing returns to high educational investment. The more parental households who choose high educational investment, the less is the return to high educational investment compared to the lower alternative. The fact that rich parental households suffer less from costly high educational investment puts the poor households at a disadvantage and the poor are more likely to be crowded out of the group that have incentives to choose high investment. The model predicts that given a certain parameter region, children of poor parents are more likely to become skilled if the fraction of rich parental households is not too large. In a multi-generational dynamic setting, it further implies the existence of a stationary household income distribution and income mobility rates. An increase in returns to education alone generates a larger stationary fraction of rich households and a larger upward income mobility rate. An increase in the cost of the high educational investment alone generates a smaller stationary fraction of rich households and a smaller upward income mobility rate. The third piece of work looks into the strategic interaction between passenger carriers over product quality and the location choice in a duopoly scheduled flight market. The model predicts that the two carriers prefer to be specialized in different flight quality (non-stop vs. one-stop) and adopt the same schedule when a higher quality difference makes the consumers less sensitive to the flight frequency. It contributes to literatures on the application of two-dimensional product differentiation in air-travel market analysis.