Publication: Inequality of Opportunity and Investment Choices
Loading...
Date
2023-09-19
ISSN
Published
2023-09-19
Author(s)
Brock, J. Michelle
Editor(s)
Abstract
Inequality of opportunity leads to misallocation of human capital and can affect economies via its impact on individual economic decision making. This paper studies the impact of inequality of opportunity on investment, using a laboratory experiment. The experiment randomized inequality of opportunity, then subjects chose to invest in a risky asset or savings. The results suggest that inequality of opportunity impacts investment choices only for people who are penalized by their circumstances and only once they learn the impact of inequality of opportunity on their relative position in the income distribution. This disadvantaged group invests more often and invests higher shares of their earnings than the control and advantaged groups. The fact that both inequality of opportunity and knowledge of relative position need to be present for the impact on investment to materialize points to the importance of peer effects. More broadly, the paper highlights the relevance of social preferences for understanding the effects of inequality of opportunity on individual decision making.
Link to Data Set
Citation
“Brock, J. Michelle; Bussolo, Maurizio. 2023. Inequality of Opportunity and Investment Choices. Policy Research Working Paper; 10569. © World Bank. http://hdl.handle.net/10986/40366 License: CC BY 3.0 IGO.”
Associated URLs
Associated content
Other publications in this report series
Publication Disentangling the Key Economic Channels through Which Infrastructure Affects Jobs(Washington, DC: World Bank, 2025-04-03)This paper takes stock of the literature on infrastructure and jobs published since the early 2000s, using a conceptual framework to identify the key channels through which different types of infrastructure impact jobs. Where relevant, it highlights the different approaches and findings in the cases of energy, digital, and transport infrastructure. Overall, the literature review provides strong evidence of infrastructure’s positive impact on employment, particularly for women. In the case of electricity, this impact arises from freeing time that would otherwise be spent on household tasks. Similarly, digital infrastructure, particularly mobile phone coverage, has demonstrated positive labor market effects, often driven by private sector investments rather than large public expenditures, which are typically required for other large-scale infrastructure projects. The evidence on structural transformation is also positive, with some notable exceptions, such as studies that find no significant impact on structural transformation in rural India in the cases of electricity and roads. Even with better market connections, remote areas may continue to lack economic opportunities, due to the absence of agglomeration economies and complementary inputs such as human capital. Accordingly, reducing transport costs alone may not be sufficient to drive economic transformation in rural areas. The spatial dimension of transformation is particularly relevant for transport, both internationally—by enhancing trade integration—and within countries, where economic development tends to drive firms and jobs toward urban centers, benefitting from economies scale and network effects. Turning to organizational transformation, evidence on skill bias in developing countries is more mixed than in developed countries and may vary considerably by context. Further research, especially on the possible reasons explaining the differences between developed and developing economies, is needed.Publication Economic Consequences of Trade and Global Value Chain Integration(World Bank, Washington, DC, 2025-04-04)This paper introduces a new approach to measuring Global Value Chains (GVC), crucial for informed policy-making. It features a tripartite classification (backward, forward, and two-sided) covering trade and production data. The findings indicate that traditional trade-based GVC metrics significantly underestimate global GVC activity, especially in sectors like services and upstream manufacturing, and overstate risks in early trade liberalization stages. Additionally, conventional backward-forward classifications over-estimate backward linkages. The paper further applies these measures empirically to assess how GVC participation mediates the impact of demand shocks on domestic output, highlighting both the exposure and stabilizing potential of GVC integration. These new measures are comprehensively available on the World Bank’s WITS Platform, providing a key resource for GVC analysis.Publication Participation in Pension Programs in Low- and Middle-Income Countries(Washington, DC: World Bank, 2025-04-24)Low- and middle-income countries are aging rapidly but stagnation of growth in participation in pension programs, due to widespread informal employment, presents a major fiscal challenge. Some claim that improving the design of pension program rules can encourage more pension contributions, while others push for universal non-contributory pensions. This paper reviews the recent academic literature on the determinants of active participation in pension systems in high- informality settings. An emerging body of evidence shows that participation responds significantly to financial incentives as well as nonfinancial obstacles. At the same time, pensions are imperfect substitutes for other strategies to cover longevity risk, including support through the family, which will remain crucial for many older people in fiscally constrained environments. Therefore, policy makers should integrate the design of contributory pensions, social pensions, and policies that facilitate other forms of elderly support and consider how all three interact. To inform such efforts, these interactions must be more systematically investigated, and the empirical evidence must be expanded beyond a small number of middle-income countries.Publication Capitalizing on Digital Transformation to Enhance the Effectiveness of Property Institutions(Washington, DC: World Bank, 2025-04-14)Property registries have long been a pillar of state capacity and a basis for private market activity. While registry establishment and operation traditionally were costly and time consuming, digital technology makes low-cost registry operation and wide outreach easier. To guide developing countries aiming to establish such registries and measure progress, this paper develops indicators (in terms of digital coverage, interoperability, and property taxation for local service delivery and public land management) of effective digital registry service provision. Data from 85 countries highlight vast differences and provide suggestions for strategic reforms as well as a basis for measuring progress over time. Expanding geographical coverage and collecting these indicators on a regular basis could provide guidance to improve the way in which, by protecting property, the state creates the basis for widely shared prosperity and a livable environment.Publication Bridging the Gap(Washington, DC: World Bank, 2025-04-21)This paper examines tax revenue shortfalls in South Asian countries. On average during 2019–23, South Asian revenues totaled 18 percent of GDP—well below the average 24 percent among emerging market and developing economies (EMDEs). Econometric estimates from stochastic frontier analysis, which control for tax rates and the size of potential tax bases, suggest that tax revenues in the region are 1 to 7 percentage points of GDP below potential, with shortfalls in five of the region’s eight countries larger than in the average EMDE. Even after controlling for country characteristics, such as widespread informal economic activity outside the tax net and large agriculture sectors, sizable tax gaps remain, suggesting the need for improved tax policy and administration. The paper discusses and provides evidence from international experience with reforms to raise government revenues.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Long-Term Evolution of Inequality of Opportunity(World Bank, Washington, DC, 2019-01)The main goal of this paper is to document and analyze the long-term evolution of inequality of opportunity and thus extend the recent empirical literature, which is mainly concerned with its measurement at a specific point in time. Using repeated cross-section surveys for five European countries (France, Germany, Great Britain, Italy, and Switzerland), the evolution of inequality of opportunity is measured for a period of about two decades for the whole populations, as well as for different birth cohorts. Relative inequality of opportunity represents an important portion of total income inequality, with values ranging from 30 to 50 percent according to the standard deviation of logs (and reaching a lower share in case of mean log deviation) and, for all the countries, it shows a stable or declining time trend. When the birth cohorts are followed across time, inequality of opportunity decreases with age: the effect of circumstances seems to weaken over the life cycle. This is a quite different age profile from that of inequality of outcomes (income or consumption), which generally increases with age. A decomposition of the relative inequality of opportunity allows highlighting some key drivers of its time evolution. In all the countries, there has been a clear enhancement of equality of educational opportunity (as captured by a downward trending intergenerational education persistence) and a reduction of the returns to education. However, for some countries, notably Italy, these trends have failed to translate into decreasing inequality of opportunity in the income distribution because of the increasing role of parental networking (an additional channel through which parental background affects the incomes of offspring).Publication Achieving Accelerated and Shared Growth in Ghana : A MAMS-Based Analysis of Costs and Opportunities(World Bank, Washington, DC, 2008-02)This paper relies on the recently developed Maquette for Millennium Development Goals Simulations (MAMS) model to assess the consistency of alternative scaling-up and policy packages for growth and achievement of the Millennium Development Goals in Ghana. In the baseline scenario, Ghana's strong near and medium-term growth outlook puts it in a good position to achieve the poverty Millennium Development Goal ahead of schedule, but other goals are likely to remain elusive before 2015. In the accelerated growth scenario-which addresses the major gaps in water and sanitation and other infrastructure-even more rapid growth and poverty reduction are possible, but important targets in the areas of education, health, and environment remain unattainable. Although growth is complementary to achievement of the Millennium Development Goals, the authors also find important growth-human development trade-offs in the near term. The estimates show that the resource requirements for achieving the key Millennium Development Goals by 2015 are large, reaching US$82 per capita in an illustrative foreign-grant financed scenario. Increased intake and retention of students contribute to rising scarcity of unskilled labor, buttressing unskilled wages, while high demand for skills from the sectors related to the Millennium Development Goals raises the returns to human capital. These developments lead to improvements in the welfare of the poorest members of Ghanaian society and contribute to a small reduction in overall inequality.Publication Structural Change and Poverty Reduction in Brazil : The Impact of the Doha Round(World Bank, Washington, DC, 2006-02)Over the medium time horizon, skill upgrading, differentials in sectoral technological progress, and migration of labor out of farming activities are some of the major structural adjustment factors shaping the evolution of an economy and its connected poverty trends. The main focus of the authors is understanding, for the case of Brazil, how a trade shock interacts with these structural forces and ascertaining whether it enhances or hinders medium-term poverty reduction. In particular, they consider the interactions between the migration of labor out of agriculture, a potentially important poverty reduction factor, and trade liberalization, which increases the price incentives to stay in agriculture. A recursive-dynamic computable general equilibrium model simulates Doha scenarios and compares them against a business as usual scenario. The authors estimate the poverty effects using a microsimulation model that primarily takes into account individuals' labor supply decisions. Their analysis shows that trade liberalization does contribute to structural poverty reduction. But unless increased productivity and stronger growth rates are attributed to trade reform, its contribution to medium-term poverty reduction is rather small.Publication Gender Aspects of the Trade and Poverty Nexus : A Macro-Micro Approach(Washington, DC: World Bank and Palgrave Macmillan, 2009)This report is on the findings of a major international research project examining the links between trade, gender, and poverty. Trade liberalization can create economic opportunities, but women and men cannot take advantage of these opportunities on an equal basis. Women and men differ in their endowments, control over resources, access to labor markets, and their roles within the household. It may seem obvious that gender differences play an important role in transmitting the effects of trade expansion to poverty, especially in less developed countries, where gender inequality is usually more pronounced. Although the literature includes numerous analyses on the links between trade and poverty and between gender inequality and poverty, it seems not to have combined these two sets of studies in a consistent empirical framework. The main objective for the research project documented in this book was to fill, at least in part, this gap in the literature. This report describes the simplest conceptual framework that can be used to analyze the linkages between trade and poverty through gender. It includes two parts. The first, based on standard international trade models, considers the linkages between trade and gender. The second, based mainly on the microeconomic models of household behavior, deals with the linkages between gender and poverty.Publication Global Inequality in a More Educated World(World Bank, Washington, DC, 2017-06)In developing countries, younger and better-educated cohorts are entering the workforce. This developing world-led education wave is altering the skill composition of the global labor supply, and impacting income distribution, at the national and global levels. This paper analyzes how this education wave reshapes global inequality over the long run using a general-equilibrium macro-micro simulation framework that covers harmonized household surveys representing almost 90 percent of the world population. The findings under alternative assumptions suggest that global income inequality will likely decrease by 2030. This increasing educated labor force will contribute to the closing of the gap in average incomes between developing and high income countries. The forthcoming education wave would also minimize, mainly for developing countries, potential further increases of within-country inequality.
Users also downloaded
Showing related downloaded files
Publication Reality Check(Washington, DC: World Bank, 2023-09-19)To address the myriad challenges posed by global climate change, countries at all income levels have put in place a diverse set of policies over the past three decades. Many governments have already made significant progress in their efforts to decarbonize, creating a rich history of implementation experiences that provides important lessons for how to successfully advance climate policy goals in a variety of different economic, cultural, and political contexts. Despite this progress, the transition to a net zero future continues to face significant barriers, including the need for large investment, a lack of institutional capacity, and challenging political economy issues. ‘Reality Check: Lessons from 25 Policies Advancing a Low-Carbon Future’ identifies key policy approaches that countries are taking to decarbonize their economies. The report classifies policies into five categories: 1. Planning for a future with zero net emissions; 2. Getting the pricing and taxes right; 3. Facilitating and triggering transitions in key systems, such as energy and food; 4. Getting the finance flowing, particularly by incentivizing private sector investment; 5. Ensuring a just transition that protects the poor. ‘Reality Check: Lessons from 25 Policies Advancing a Low-Carbon Future’ fills a critical research gap by documenting low-carbon policy trends and providing a series of case studies across sectors and geographies. The 25 case studies furnish country contexts and policy details, examine results and impacts, and outline key takeaways and lessons learned for enabling further ambition in achieving emissions reductions. The report contributes to an evolving analytical agenda on how to reduce carbon emissions while achieving economic development and the strategic transition to a greener, more resilient, and more inclusive future.Publication Ghana’s Pharmacovigilance Experience(Washington, DC: World Bank, 2023-09-21)The objective of this report is to examine the development of pharmacovigilance (PV) in Ghana and illustrate the role it plays in the health system, and more recently, during the COVID-19 emergency response. It concludes by offering some relevant lessons for building PV capacity in other low-and middle-income countries.Publication Fixing the Foundation(Washington, DC: World Bank, 2023-09-20)Countries in middle-income East Asia and the Pacific were already experiencing serious learning deficits prior to the COVID-19 pandemic. COVID-related school disruptions have only made things worse. Learning poverty -- defined as the percentage of 10-year-olds who cannot read and understand an age-appropriate text -- is as high as 90 percent in several countries. Several large Southeast Asian countries consistently perform well below expectations on adolescent learning assessments. This report examines key factors affecting student learning in the region, with emphasis on the central role of teachers and teaching quality. It also analyzes the role education technologies, which came into widespread use during the pandemic, and examines the political economy of education reform. The report presents recommendations on how countries can strengthen teaching to improve learning and, in doing so, can enhance productivity, growth, and future development in the region.Publication Improving Effective Coverage in Health(Washington, DC: World Bank, 2022-05-11)In many low- and middle-income countries, health coverage has improved dramatically in the last two decades, but health outcomes have not. As such, effective coverage -- a measure of service delivery that meets a minimum standard of quality -- remains unacceptably low. This Policy Research Report examines one specific policy approach to improving effective coverage: financial incentives in the form of performance-based financing (PBF) or financial incentives to health workers on the front lines. The report draws on a rich set of rigorous studies and new analysis. When compared to business-as-usual, in low-income settings with centralized health systems PBF can result in substantial gains in effective coverage. However, the relative benefits of PBF are less clear when it is compared to two alternative approaches, decentralized facility financing which provides operating budget to frontline health services with facility autonomy on allocation, and demand-side financial support for health services (i.e., conditional cash transfers and vouchers). While PBF often results in improvements on the margins, closing the substantial gaps in effective health coverage is not yet within reach for many countries. Nonetheless, there are important lessons learned and experiences from the roll-out of PBF over the last decade which can guide health policies into the future.Publication The Economic Cost of Exclusion Based on Sexual Orientation, Gender Identity and Expression, and Sex Characteristics in the Labor Market in the Republic of Serbia(Washington, DC: World Bank, 2023-09-26)Recent research suggests that the effects of stigma, discrimination, and exclusion against lesbian, gay, bisexual, transgender, and intersex (LGBTI) people could be costing economies billions of dollars. There are numerous reasons for these costs, including adverse educational environments, employment discrimination, physical and mental health disparities, and violence. This research aims to estimate the economic cost of exclusion based on sexual orientation, gender identity and expression, and sex characteristics (SOGIESC) in the Republic of Serbia and to provide the country’s policy makers, civil society, and development partners with new evidence on the ongoing policy dialogue on strengthening the social inclusion of lesbian, gay, bisexual, transgender, and intersex (LGBTI) people. To estimate the cost of exclusion, this report presents two theoretical models focused on the labor market and related issues. The first model centers mainly on the accumulated loss of individual wages due to the consequences of exclusion. The second model calculates the negative effect of exclusion on accumulated fiscal revenues (due to lower income and payroll taxes) and expenditures (due to higher expenditures for unemployment benefits and active labor market programs).