Opportunity and Inequality across Generations

Winfried Koeniger and Carlo Zanella

No 2003, Economics Working Paper Series from University of St. Gallen, School of Economics and Political Science

Abstract: We analyze inequality and mobility across generations in a dynastic economy. Nurture, in terms of bequests and the schooling investment into the next generation, is observable but the draw of nature in terms of ability is hidden, stochastic and persistent across generations. We calibrate the model to U.S. data to illustrate mechanisms through which nurture and nature affect mobility and the transmission of income inequality across generations, thus complementing the vast empirical literature. To provide a benchmark for the observed status quo, we solve for the social optimum in which the planner weighs dynasties equally and chooses optimal tax schedules subject to incentive compatibility. Analyzing the transition from the calibrated steady state to this social optimum, we find that insurance against intergenerational ability risk increases on the transition path by making welfare of family dynasties more dependent on nurture relative to nature. The insurance comes at the cost of less social mobility. We compare welfare in the social optimum and economies with a simple history-independent tax and subsidy system.

Keywords: Human capital; schooling; bequests; asymmetric information; intergenerational mobility; inequality (search for similar items in EconPapers)
JEL-codes: E24 H21 I24 J24 J62 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2020-02
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
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Related works:
Journal Article: Opportunity and inequality across generations (2022)
Working Paper: Opportunity and Inequality across Generations (2022)
Working Paper: Opportunity and Inequality across Generations (2020)
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