Inequality in Human Capital and Endogenous Credit Constraints

Abstract

This paper studies the determinants of inequality in human capital with particular emphasis on the role of the credit constraints. We develop and estimate a model in which individuals are subject to uninsured human capital risks and invest in education, acquire work experience, accumulate assets, and smooth consumption. Agents can borrow up to a model-determined limit, which we explicitly derive from a private lending market natural borrowing limit and government student loan programs. We also quantify the effects of cognitive ability, noncognitive ability, parental education, and parental wealth on educational attainment, work experience, and consumption. We conduct counterfactual experiments with respect to tuition subsidy and enhanced student loan limits and evaluate their effects on educational attainment and inequality.

Keywords: Human Capital, Credit Constraints, Education, Wealth

JEL Classification: I2, J2