Parental Priorities and Economic Inequality

by Casey B. Mulligan

Chapter III

Two Models of Opportunity and Intergenerational Mobility

Chapter III takes models of altruistic parental priorities and combines them with models of family opportunities, deriving implications for parental choices and ultimately the economic success of children. The first of the two models, the "intergenerational permanent income model," has received a great deal of attention in economics. It is, for example, the basis of Barro's (1974) "Ricardian Equivalence Theorem" which states , because families rather than governments control the division of resources across generations, government deficits and other policies that attempt to redistribute resources from one generation to the next do not have an important effect on economic activity. Other implications are studied in detail by Becker (1991, chapter 6), Becker and Tomes (1979, 1986). In addition to implications for the dynamics of earnings and for the relationship between educational attainment and parental income, the intergenerational permanent income model has strong predictions for the transmission of consumption inequality.

Second is an "Imperfect Capital Markets" or "Borrowing Constraints" model. It assumes that parents cannot borrow against the earnings of their children and, under some conditions, produces a very different set of predictions than does the permanent income model.

© copyright 1996, Casey B. Mulligan.