Reparations and Persistent Racial Wealth Gaps

Abstract

We present a first formal, dynamic, economic analysis of reparations using a long-run model of heterogeneous dynasties with an occupational choice and bequests. Our innovation is to introduce endogenous dispersion of beliefs about risky returns, reflecting differences in dynasties' investment experiences over time. Feeding the exclusion of Black dynasties from labor and capital markets as driving force, the model quantitatively reproduces current and historical racial gaps in wealth, income, entrepreneurship, mobility, and beliefs about risky returns. We evaluate whether different forms of reparations compensate for historical exclusions, which means restoring the long-run outcomes we would have observed in the absence of exclusions. We find that direct transfers that eliminate the racial gap in average wealth today do not lead to long-run wealth convergence, which is the long-run outcome without exclusions. The logic is that century-long exclusions lead Black dynasties to enter into reparations with pessimistic beliefs about risky returns and to forego investment opportunities. We show that investment subsidies are more effective than wealth transfers in eliminating the racial wealth gap. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.