Poverty and Disequalization

We study the intergenerational transmission of inequality using a model in which parents can make both financial and occupational bequests to their children. An equal steady state with high per capita skill can co-exist with unequal steady states with low per capita skill. We investigate dynamics starting from arbitrary initial conditions. The main result is that even if a country starts with a perfectly equal wealth distribution, it converges to an unequal steady state if its initial per capita wealth falls below a threshold, and to the equal steady state otherwise. Hence initial poverty (even with perfect equality) can generate long-term inequality, and undermine economic development.