Inequality and Public Resource Allocation


We set up a signaling game where individuals differ in ability and wealth. Higher ability means larger benefit supported by the government. Costly signals are used to transmit information regarding own deservingness. However, capital market imperfections may perturb the signals by limiting the capacity of poor people to send the appropriate signal. We examine the cost in efficiency produced by the existing inequality in the distribution of wealth.
Published as: Inequality, Lobbying and Resource Allocation in American Economic Review , Vol. 96, No. 1, 257--279, January, 2006