Is lifetime inequality mainly due to differences across people established early in life or to differences in luck experienced over the working lifetime? We answer this question within a model that features idiosyncratic shocks to human capital, estimated directly from data, as well as heterogeneity in ability to learn, initial human capital, and initial wealth. We find that, as of age 23, differences in initial conditions account for more of the variation in lifetime earnings, lifetime wealth and lifetime utility than do differences in shocks received over the working lifetime.
American Economic Review
E21: Macroeconomics: Consumption; Saving; Wealth
D30: Distribution: General
D91: Intertemporal Consumer Choice; Life Cycle Models and Saving