Endogenous Persistent Inequality when Markets are Perfect1.

This paper exhibits a mechanism of endogenous formation and persistence of inequality through invest-ment in human capital in the overlapping generations framework, with perfect capital market. The results are based on the effects that exact comparative advantages agents have on their occupational choice. It is shown that entrepreneurial decisions and human capital investment depend on the inherited level of human capital, when agents who inherit a relatively low level of human capital are better off being workers. Those who inherit a relatively high level of human capital are better off being entrepreneurs and they earn higher revenue. The human capital threshold that separates agents in the two categories is endogenous and varies with the equilibrium wage. Therefore the economy may experience upward or downward mobility depending on the variation of the equilibrium wage. In the long run, inequality persists and the workers never catch up with the entrepreneurs. However the model exhibits long run multiple equilibria (meaning a continuum of steady state with inequality)