The political economy of intergenerational income mobility

• Institute for the Study of Labor

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17 March 2010International comparisons of intergenerational mobility must take into account differences in politico-economic institutions, according to this study.

The intergenerational elasticity of income is considered one of the best measures of the degree to which a society gives equal opportunity to its members. While much research has been devoted to measuring this reduced-form parameter, less is known about its underlying structural determinants. Using a model with exogenous talent endowments, endogenous parental investment in children and endogenous redistributive institutions, we identify the structural parameters that govern the intergenerational elasticity of income. The model clarifies how the interaction between private and collective decisions determines the equilibrium level of social mobility. Two societies with similar economic and biological fundamentals may have vastly different degrees of intergenerational mobility depending on their political institutions. This study offers empirical evidence in line with the predictions of the model.