Improvement in Information, Income Inequality, and Growth

We analyze the importance of information about individual skills for understanding economic growth and income inequality. The paper uses the framework of an OLG economy with endogenous investment in human capital. Agents in each generation differ by random individual ability, or talent, which realizes in the second period of life. The human capital of an agent depends on both his talent and his investment in education. The investment decision is based on a public signal (test outcome) which screens all agents for their talents. We analyze how a better information system, which allows more efficient screening, affects the co-movements of indicators for income inequality and human capital accumulation