Human Capital, Heterogeneity, and Estimated Degrees of Intergenerational Mobility

with Song Han

Abstract

Some of the important implications of the parental investment model of intergenerational mobility have been derived under the assumption that parental income is the main source of heterogeneity. We explicitly model the variability and inheritability of "innate" earnings ability and the variability of tastes, showing how they affect observed intergenerational consumption and earnings mobility. Heteregeneity increases the difficulty of detecting the existence of borrowing constrained families. Conversely, the presence of heteregeneity means that economic and linear statistical models of inheritance generate similar intergenerational data on consumption and earnings. In this sense, our findings offer some support for Goldberger's (1989) criticism of human capital models of inheritance. Finally, we suggest that any cross-country differences in intergenerational earnings mobility are more readily interpreted according to the heterogeneity of inherited ability, rather than optimal family responses to country-specific institutions for accumulating human capital.

Hard and electronic copies of the paper are circulated as:

NBER Working Paper No. 7678, April 2000.