Human Capital and Optimal Redistribution

Item Type Journal paper

We characterize optimal redistribution in a dynastic economy with observable human capital and hidden ability. We show that the wedge between human capital investment in the laissez faire and the social optimum differs from the wedge for bequests because (i) returns to human capital are risky, and (ii) human capital may change informational rents. We compute the optimal allocation when ability is persistent across generations, as calibrated for the U.S. We show how the allocation can be implemented with student loans featuring contingent repayments. The quantitative results reveal that human capital investment should (i) increase in parental income because of ability transmission across generations, but (ii) decrease in inherited assets because of the negative effect of wealth on labor supply.

Authors Koeniger, Winfried & Prat, Julien
Journal or Publication Title Review of Economic Dynamics
Language English
Subjects economics
Institute/School SEW - Swiss Institute for Empirical Economic Research
SEPS - School of Economics and Political Science
HSG Classification contribution to scientific community
HSG Profile Area SEPS - Quantitative Economic Methods
Refereed Yes
Date January 2018
Publisher Elsevier
Place of Publication Amsterdam
Series Name School of Economics and Political Science, Discussion Paper Series
Volume 27
Number 1
Page Range 1-26
Number of Pages 26
ISSN 1094-2025
ISSN-Digital 1096-6099
Publisher DOI 10.1016/
Depositing User Susanne Moser
Date Deposited 11 Jan 2018 15:42
Last Modified 11 Jan 2018 15:42


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Koeniger, Winfried & Prat, Julien (2018) Human Capital and Optimal Redistribution. Review of Economic Dynamics, 27 (1). 1-26. ISSN 1094-2025

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