Opportunity and Inequality Across Generations

60 Pages Posted: 20 Feb 2020

See all articles by Winfried Koeniger

Winfried Koeniger

University of St. Gallen; CESifo (Center for Economic Studies and Ifo Institute); Center for Financial Studies (CFS); IZA Institute of Labor Economics

Carlo Zanella

University of Zurich - Department of Economics

Date Written: 2020

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

JEL Classification: E240, H210, I240, J240, J620

Suggested Citation

Koeniger, Winfried and Zanella, Carlo, Opportunity and Inequality Across Generations (2020). CESifo Working Paper No. 8099, Available at SSRN: https://ssrn.com/abstract=3541447

Winfried Koeniger (Contact Author)

University of St. Gallen ( email )

Swiss Institute for Empirical Economic Research
Varnbüelstr. 14
St.Gallen, CH-9000
Switzerland

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Schaumburg-Lippe Str. 7/9
D-53072 Bonn
Germany

Carlo Zanella

University of Zurich - Department of Economics ( email )

Zürich
Switzerland

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