Does Money Matter for Intergenerational Income Transmission?
51 Pages Posted: 18 Nov 2016 Last revised: 28 Oct 2018
Date Written: November 18, 2016
The intergenerational income elasticity is a crucial measure of income mobility. In this paper we develop a structural model to examine the channels through which this elasticity operates. Using data from the Panel Study of Income Dynamics, we separately identify the human capital and the financial component. The human capital component examines the transmission of human capital, independent of financial investments while the financial component examines the impact of income that is uncorrelated with human capital, that is, exogenous income. Using a two stage framework, we show that the intergenerational income elasticity operates through both channels. Moreover, our estimates show that the financial component may have a larger effect than previously estimated, plausibly attributing to 36 percent of intergenerational income transmission. Indeed, this result holds even when the financial component is defined in an incredibly narrow manner. This suggests that cash payments could promote intergenerational mobility.
Keywords: Intergenerational Income, Human Capital, Income Mobility
JEL Classification: D31, E24, J62
Suggested Citation: Suggested Citation