Working Paper: CEPR ID: DP15796
Authors: Job Boerma; Loukas Karabarbounis
Abstract: We analyze the magnitude and persistence of the racial wealth gap using a long-run model of heterogeneous dynasties with an occupational choice and bequests. Our innovation is to introduce endogenous beliefs about risky returns, reflecting differences in dynasties' investment experiences over time. Feeding the exclusion of Black dynasties from labor and capital markets into the model as the only driving force, we find that the model quantitatively reproduces current and historical racial gaps in wealth, income, entrepreneurship, mobility, and beliefs about risky returns. We explore how the future trajectory of the racial wealth gap might change in response to various policies. Wealth transfers to all Black dynasties that eliminate the average wealth gap today do not lead to long-run wealth convergence. The logic is that centuries-long exclusions lead Black dynasties to hold pessimistic beliefs about risky returns and to forgo investment opportunities after the wealth transfer. Investment subsidies toward Black entrepreneurs are more effective than wealth transfers in permanently eliminating the racial wealth gap.
Keywords: reparations; race; gaps; wealth; entrepreneurship; beliefs
JEL Codes: E21; D31; J15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exclusion of black dynasties from labor and capital markets (J79) | persistence of the racial wealth gap (I24) |
| historical exclusions (J15) | pessimistic beliefs about risky returns (G41) |
| pessimistic beliefs about risky returns (G41) | lack of long-run wealth convergence (F62) |
| wealth transfers to black dynasties (D31) | lack of long-run wealth convergence (F62) |
| investment subsidies for black entrepreneurs (L26) | reduction of the racial wealth gap (I24) |
| historical lack of positive investment experiences (G41) | forgoing of investment opportunities by black dynasties (D14) |