Segregation, Education Cost, and Group Inequality

Abstract

Abstract This study analyzes the interplay between the segregation level, education cost, and the evolution of group inequality. In a market economy, individuals have incentives to invest in skill acquisition because of wage differentials. Because skill achievement is costly, a person with a higher inherent ability or a better community background is more likely to invest. Bowles, Loury, and Sethi (2014) show the possibility of group inequality evolution with a high level of segregation when network externalities over the skill acquisition period affect an individual’s decision of skill achievement. This study emphasizes the effect of education costs on the evolution of group inequality. Even when the level of segregation is high, if the societal education cost of skill acquisition is not sufficiently large, group skill disparity may not evolve. Observing that education costs vary significantly across countries depending on the structure of their educational institutions, this theoretical analysis suggests that some countries may suffer more from between-group disparity than others because their education systems impose higher costs on individuals.