Social Interactions and Optimal Progressivity of Redistribution
41 Pages Posted: 26 Feb 2018
Date Written: February 15, 2018
Parental education largely determines a child's opportunity to learn. However, a higher level of trust and a higher frequency of social interactions between adults with significantly different educational attainments shrinks the knowledge-gaps among the adults, making their human capital more substitutable for a child's education. We find that if the substitutability of parental human capital increases to enhance the atmospheric impact of past knowledge in the private education technology, then the growth and welfare maximizing progressivity of redistribution decreases. In particular, bridging the knowledge gaps through social interactions makes learning cheaper for underprivileged children. Such reduction in inequality of opportunity lowers the optimal progressivity of redistribution. We offer some empirical support for the above idea using a recently developed database on social cohesion which attempts to measure trust and frequency of interactions across different culture, religions and other forms of heterogeneity. Numerically, for calibrated economies, we estimate how gains in growth, efficiency, and welfare from progressive redistribution, over and above the benefits from a Pigouvian subsidy, may reasonably vary across different countries with different degrees of social cohesion.
Keywords: Knowledge Dissemination, CES Aggregator, Endogenous Growth, Progressivity, Social Cohesion, Dynamic Macroeconomic Cost-Benefit Tradeoff
JEL Classification: JEL: E25, E62, O11, O15, O23, O33, O41
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