Economic Policy and Equality of Opportunity

We employ EOP definitions that have appeared in the philosophical literature on distributive justice, and apply it to a formal economic model which incorporates human capital investment and luck within and across generations. The human capital acquisition technology features multiple stages of parental investments during childhood, and on-the-job investments in adulthood. The benchmark model features an intergenerational borrowing constraint, education and low-income subsidies which are financed by a progressive income tax. The model is calibrated to the U.S. in 1990, on which we operationalize philosophical concepts by using the children’s continuation values as outcomes, and the state space of the recursive decision problem as circumstances. This reveals that intergenerational investments should be accounted for when comparing measures of EOP. When conditioning on parental luck instead of outcomes, EOP looks much larger: luck is overwhelmed by human capital accumulation. In contrast, when looking at children’s net wealth instead of lifetime earnings, EOP looks worse: intergenerational borrowing constraints are more pronounced in wealth than in earnings. In counterfactual experiments, we find that education subsidies increase utilitarian welfare and decrease overall inequality, but does little to promote EOP. This is for two reasons: when one takes the view that intergenerational efforts should be rewarded, there is little room for improvement in EOP to begin with. On the other hand, when one takes the view that intergenerational efforts should not be rewarded, much stronger redistribution is needed for the policies to have a quantitative impact. ∗Email: [email protected] and [email protected], respectively. We are very grateful for constructive comments by Richard Arneson, Steven Durlauf, and participants of the Normative Ethics and Welfare Economics conference held at the Becker-Friedman Institute. All remaining errors are our own.