A Model of Educational Investment, Social Concerns, and Inequality

We consider a model in which educational investments entail productivity gains, signaling power, and social status. The latter depends on the agent's relative achievement in one of three dimensions: innate skills, level of schooling, and income. We study the three scenarios separately and characterize the conditions under which social concerns increase or decrease educational and income inequality. Inequality increases (decreases) if education lowers the stigma suffered by low-skilled workers less (more) than it boosts the prestige enjoyed by high-skilled workers. We discuss the expected results of some policies in light of these findings.