A1446
Title: Information and inequality
Authors: Xiaowen Lei - Simon Fraser University (Canada) [presenting]
Kenneth Kasa - Simon Fraser University (Canada)
Abstract: The relationship between information acquisition and capital income inequality is studied. Investors have a Shannon information-processing constraint, which can be relaxed through costly information acquisition. A competitive equilibrium is characterized by solving a Pareto problem with endogenous Pareto weights. Heterogeneous beliefs evolve endogenously as a function of the Pareto weights. Allocations are decentralized by introducing equity and bond markets, and a market for information. The equilibrium features a wealth inequality amplification mechanism previously highlighted in the literature, in which wealthy investors optimally choose to acquire more information. Evidence is provided suggesting that rising capital income inequality can be partially attributed to endogenous information acquisition.
