Human capital, inequality, and growth: A local perspective

A recent body of work has demonstrated the crucial role played by local human capital externalities and local school funding in generating socio-economic segregation, persistent poverty, and low aggregate income or productivity growth. We present a simple model which captures the main insights from this literature, and prove three general propositions. First, minor differences in education technologies, preferences, wealth, or minor imperfections in capital markets, can lead to a high degree of stratification. Second, stratification makes inequality in education and income more persistent across generations; the same is true for total wealth, provided the rich succeed in capturing the rents created by their secession. Finally, this polarization or urban areas can be very inefficient, especially in the long run.