Rich Dad, Smart Dad: Decomposing the Intergenerational Transmission of Income

Abstract

We construct a simple model, consistent with Becker and Tomes (1979), that decomposes the intergenerational income elasticity into the causal effect of financial resources, the mechanistic transmission of human capital, and the role that human capital plays in the determination of father’s permanent income. We show how a particular set of instrumental variables could separately identify the money and human capital transmission effects. We further outline two instrumental variables methods for bounding the structural parameters of our model in the presence of imperfect instruments. Using data from a thirty-five percent sample of Swedish sons and their fathers, we show that only a minority of the intergenerational income elasticity can be plausibly attributed to the causal effect of fathers’ financial resources.

Keywords: Intergenerational Income Inequality, Does Money Matter, Intergenerational Income Elasticity

JEL Classification: D31, I30, J24, J30, J62