Intergenerational Mobility and Income Redistribution Under Majority Voting

Abstract

This paper extends an intergenerational context to the prospect of upward mobility hypothesis, showing that the poor majority in democracies may not support massive redistribution for the sake of their children’s educational attainment and upward mobility. We develop an overlapping generations model in which human capital formation depends on individual effort and educational resources. Parents vote on redistributive policies under majority rule by considering the disincentive effects of high tax rates on children’s study efforts. We characterize the stationary Markov perfect equilibrium in which children respond negatively to the extent of redistribution, and parental altruism discourages poor voters from expropriating the rich. Under private education, a tax rate is only credible above a certain threshold, and children’s efforts and their parental inputs are complements in the steady state. Under public education, a credible policy embodies a moderate income tax combined with a small educational fund. Under both school systems, the optimal credible tax increases with wage inequality and decreases as parental altruism becomes stronger.

Keywords: intergenerational mobility, income taxation, parental altruism, study effort, educational system