Parental Priorities and Economic Inequality

by Casey B. Mulligan

Chapter VIII

Borrowing Constraints and the Persistence of Inequality

This chapter tests some of the implications of the intergenerational borrowing constraints model. In particular, the presence of borrowing constraints affects the rate of regression to the mean of consumption and earnings or wages:

  1. Among families that are making financial intergenerational transfers, consumption does not regress to the mean at all.
  2. Earnings regress to the mean more rapidly among families that are making financial transfers.
  3. Earnings of adult children are less unequal across families that make financial transfers.
  4. Richer parents are more likely to make financial transfers to children.
Notice that these implications distinguish two groups of families - one that makes financial transfers and another that does not. The second group wishes to borrow against the earnings of children in order to finance parental consumption and human capital investments for children (ie, make negative rather than positive financial transfers), but cannot because of the assumed borrowing constraint. These implications are an interesting contrast to the permanent income model - where all families make financial transfers of some kind - as well as more mechanical models of intergenerational mobility such as those reviewed by Goldberger (1989) that make no distinction between families that do and do not participate in financial markets. More subtle versions of these hypotheses are also considered.

© copyright 1996, Casey B. Mulligan.