A Model of Educational Investment and Social Status

We consider a model in which educational investments entail productivity gains, signaling power, and social returns. The latter depend on the relative position the agent occupies in one of three di¤erent dimensions: (i) his innate characteristics, (ii) his level of schooling, and (iii) his level of income. The agent enjoys social prestige (or su¤ers from social stigma) if he overperforms (or underperforms) in the relevant dimension. If prestige is relatively stronger than stigma, we show that social concerns always lead to an increase in inequality both in terms of educational achievements and income. In contrast, if stigma is stronger than prestige, we show that inequality may either increase or decrease depending on the relevant social dimension. Furthermore, the dimension of social concerns and the relative importance of prestige against stigma also a¤ect the reaction of the economy to policy interventions and exogenous shocks.