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Title: Luck and Effort: Learning About Income from Friends and Neighbors
Citation Type: Miscellaneous
Publication Year: 2016
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Abstract: Can social segregation explain differences in beliefs regarding the role of effort in determining high incomes? I develop a model of lineages of agents learning about the effect of effort on the probability of receiving a high income based on their own experience (effort chosen and income received) and the experiences of agents in their networks. Simulating economies of these agents, only two conditions are needed for the existence of long-run differences in beliefs: (i) agents assume their networks are representative of the whole economy, and (ii) they are more likely to meet others with similar life experiences-as under social segregation. For my analysis, I also consider (iii) imperfect intergenerational transmission of beliefs, in the form of partial confidence about parents beliefs, to account for sizable changes in beliefs due to single mobility experiences. I find a positive relationship between the degree of social segregation and the level of long-run differences in beliefs. Moreover, high levels of social segregation can lead agents to make inefficient effort choices while average beliefs drift away from real parameters. High levels of social segregation generate groups of agents who persistently exert (no) effort coexisting with agents choosing depending on their cost of effort. And, mobility experiences resulting from luck decrease the belief about the role of effort.
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Authors: Caballero, Gustavo A
Publisher: University of Calgary
Data Collections: IPUMS USA
Topics: Housing and Segregation, Poverty and Welfare
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