DP15796 Reparations and Persistent Racial Wealth Gaps

Author(s): Job Boerma, Loukas Karabarbounis
Publication Date: February 2021
Date Revised: February 2021
Keyword(s): beliefs, entrepreneurship, Race Gaps, reparations, wealth
JEL(s): D31, E21, J15
Programme Areas: Labour Economics, Public Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15796

Reparations is a policy proposal aiming to address the wealth gap between Black and White households. We provide a first formal analysis of the economics 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' experiences with entrepreneurship 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 use the model to evaluate reparations and find that transfers eliminating the racial gap in average wealth today do not lead to wealth convergence in the long run. 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 conclude by showing that entrepreneurial subsidies are more effective than wealth transfers in achieving racial wealth convergence in the long run.