Inequality of Opportunity and Investment Choices

Abstract

Inequality of opportunity (IOp) leads to misallocation of human capital and can affect economies via its impact on individual economic decision making. This paper studies the impact of IOp on investment, using a laboratory experiment. We randomized IOp, then subjects chose to invest in a risky asset or savings. Our results suggest that IOp impacts investment choices only for people who are penalized by their circumstances and only once they learn the impact of IOp on their relative position in the income distribution. This disadvantaged group more often invests and invests higher shares of their earnings than the control and advantaged groups. The fact that both IOp and knowledge of relative position need to be present, for the impact on investment to materialize, points to the importance of peer effects, and social preferences more broadly, for understanding the effects of IOp on individual decision making.

Keywords: inequality of opportunity, investment, risk, unfair inequality

JEL Classification: D14, D31, D63, D91, G41