Opportunity and Risk

Abstract

The standard measures of intergenerational mobility in economic literature do not account for risk. The estimates of relative and absolute mobility are usually based on the conditional mean function for children's life outcomes given parent's outcomes. We develop a broader approach where conditional variance of children's outcome is a summary statistic for life-time risks. Using data from three large developing countries with 42 percent of the world population in 2000 (China, India, and Indonesia), we estimate simultaneously conditional mean and conditional variance functions for children's schooling by a maximum likelihood estimator. We find robust evidence of a strong negative association between father's schooling and children's life-time schooling risks as captured by conditional variance across all three countries. Being born to an educated father confers double advantages: a higher mean and a lower variance. We derive risk-adjusted measures of relative and absolute mobility by accounting for an estimate of the risk premium implied by the conditional variance faced by children at birth. The estimates of risk-adjusted measures suggest that the standard measure of relative educational mobility, intergenerational regression coefficient, substantially overstates the relative mobility of the disadvantaged subgroups: children of low-educated parents, daughters, and rural children. For the most disadvantaged children (fathers with no schooling), the overestimation is 35.63% in China, 46.58% in India, and 20.94% in Indonesia. In contrast, the overestimation is negligible for the children of college-educated fathers. The methodology developed here is of wider interest: the risk-adjusted measures can be readily applied to intergenerational income mobility analysis, and can provide a more in-depth understanding of the effects of government policies on intergenerational mobility.

Keywords: Lifetime Risks, Conditional Variance, Intergenerational Mobility, Risk-adjusted Relative and Absolute Mobility, Education, China, India, Indonesia

JEL Classification: I24, J62, O12