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Repercussions of Endogenous Fast Rising Top Inequality

This paper develops a fully-solvable equilibrium matching model of incomplete information with early skill acquisition to provide general theoretical insights into fast rising top income inequality observed in the United States. Fast rising top income inequality is endogenously accommodated: In response to a change in each factor contributing to rising inequality, the equilibrium percentage changes in skill investment, income, and firm earnings are monotonically increasing in individual type, switching from negative to positive at respective cutoff types. Rising income inequality is shown to have serious repercussions on welfare and efficiency. A change in each factor contributing to rising inequality makes individuals of type below a corresponding cutoff type worse off but individuals of type above better off. However, only changes in firm-related factors necessarily improve efficiency.