Abstract:
We analyze herein the effects of the human capital adjustment cost on social mobility.
Such an adjustment cost is modeled as a rising marginal cost schedule for augmenting
human capital. We use a general human capital technology, which disentangles the
adjustment cost from the depreciation cost of the human capital. Missing credit markets
prevent individuals from equalizing the initial differences in the human capital. We find
that a higher adjustment cost for human capital acquisition slows down the social mobility
and results in a persistent inequality across generations. On the other hand, a higher rate of
human capital depreciation could increase mobility via a positive effect on new investment.
The quantitative analysis of our model suggests that the human capital adjustment
cost is nontrivial to account for the observed persistence of inequality and social mobility.
In addition, we find that the government redistribution policy could account for the large
observed variation in estimates of social mobility.
