Economic Interpretations of Intergenerational Correlations

with Nathan Grawe


Measuring intergenerational correlations is as old as empirical social science itself (e.g., Galton's 1869 study of the success and eminence of relatives or his 1889 regression analysis of the heights of parents and children), but extensive use of economic theory to interpret these correlations is much more recent. It would seem that economic theory, with its concepts of supply, demand, investment, incentives, missing markets, etc., might have great potential in this field. For example, it might provide a unified treatment of a variety of interesting indicators of socioeconomic position – such as earnings, income, occupation, or wealth. Or it might predict how taxes, subsidies, and economic regulation might help or hinder intergenerational mobility and the operation of the relevant markets. The purpose of our paper is to give an overview of many of the economic interpretations of intergenerational correlations that have been proposed to date, describe some of the empirical successes and failures of those interpretations, and to suggest where further application of economic theory might have highest return in these fields.

Of course, earnings, wealth, and the like are economic measures of a person's status, so it is natural that economists would be engaged in studies of intergenerational mobility according to these measures. Furthermore, it is the economic way of thinking that quickly leads to attempts to measure things in terms of money so, for example, the degree of mobility of a money-measured status indicator might be readily comparable over time or across countries. Nonetheless, it could be the case that, beyond some of these questions of measurement, economic theory is not particularly helpful for understanding the inheritance process. Goldberger (1989) is quite explicit about this point. By emphasizing the distinction between genes and environment, and using statistical theory as the main analytical tools, Bowles and Gintis' chapter is also suggesting that economic theory is not the starting point for interpreting intergenerational correlations. We take this view very seriously, and our review puts the burden on economic theorists to demonstrate that they have added something significant to predicting empirical intergenerational economic relationships.

Section I provides a broad overview theoretical work using a familiar partition of determinants of a person's earnings. Because a full treatment of all relevant theory is impossible, in Sections II and III we examine in detail two modeling blocks–credit market failure and intrahousehold allocation. In order to assess the value of theory in creating public policy, Section IV then considers two government programs – public investments in human capital and bequest taxes. Finally, Section V provides a partial scorecard for the economic theory in an attempt to evaluate the case for or against the utility of economic theory in studies of intergenerational mobility.

© copyright 2001 by Nathan Grawe and Casey B. Mulligan.