T8: Household Heterogeneity, Financial Frictions and Inequality

Project Start:01/2016
Researchers:Horst Entorf, Nicola Fuchs-Schündeln, Markus Gangl, Martin Götz, Zhao Jin, Philipp Krüger, Alexander Ludwig, Ctirad Slavik, Eirini Tatsi, Hitoshi Tsujiyama
Category: Household Finance, Macro Finance
Funded by:LOEWE

This project investigates different sources of inequality in society. Understanding these sources has (or should have) very high priority on the policy agenda because it is of key relevance for the design of policies that target at a more equal distribution of resources and financial stability. The three specific sources of inequality under investigation in this project are (i) education, (ii) labor supply decisions, hence the income generating process, and (iii) financial frictions. The project looks at these three sources in four different subprojects that complement each other. Subprojects A and B look at the role of education and education policies from different perspectives and using different methodologies. Subproject C investigates more closely the role of labor supply in the income generating process, and the relevance of labor supply decisions in light of progressive taxation for trends in inequalities within and across countries. Subproject D looks specifically at the role of financial markets and frictions as driving forces for inequalities, and analyzes consequences of relaxing these frictions. The four different subprojects are inherently linked. For example, subproject B extends subproject A’s focus on school education by looking at the interrelation between different education stages over a household’s life-cycle and the implications for policy. Subproject C models in detail labor supply decisions, an aspect where subproject B takes a shortcut. Financial frictions affect decisions of households both at the education as well as at the labor market stages of the life-cycle, and subproject D takes a closer look at how financial frictions and (partial) removal of those affect trends in inequality. These linkages across subprojects will also be emphasized in a policy paper which will be written at the end of the funding period to summarize our key findings and to provide a synthesis.