Parental Priorities and Economic Inequality

by Casey B. Mulligan

Detailed Table of Contents

List of Illustrations........................................................ix

List of Tables.............................................................xiii

Acknowledgments..............................................................xv

1  The Argument for Parental Priorities.......................................1
     Altruistic Parental Priorities...........................................2
     Two Models of Opportunity and Intergenerational Mobility.................3
     How Altruism is Influenced by Economic Status............................3
     Evidence on the Dynamics of Economic Inequality..........................4
     Arguments from Other Disciplines.........................................6
     Other Implications of Endogenous Altruism................................6
     Choice and the Economic Approach.........................................7
     On the Methodology of Endogenizing Preferences...........................9

Part 1  Modeling Altruism and Intergenerational Mobility
2  Indifference Curve Diagrams as Models of Parental Priorities..............13
     Altruism................................................................14
     Timing of Parental and Child Consumption................................14
     Indifference Curve Diagrams.............................................16
     Intergenerational Altruism..............................................18
     Altruism and Economic Status............................................19
     Summary.................................................................21

3  Two Models of Opportunity and Intergenerational Mobility..................23
     Introduction............................................................23
     The Permanent Income View of Intergenerational Mobility.................26
          Economic Opportunities with Exogenous Earnings.....................26
          The Transmission of Inequality with Exogenous Earnings.............30
          Opportunities and Inequality with Parental Investments in Children.38
          Review of the Main Points..........................................44
     The Imperfect Capital Markets View......................................45
          Opportunities with an Intergenerational Borrowing Constraint.......47
          Transmission of Consumption Inequality.............................48
          Transmission of Earnings Inequality................................54
          Human Capital, Ability and Family Background.......................55
          Are the Permanent Income and Imperfect Capital Markets Models
               Different?....................................................57
          Review of the Main Points..........................................62
     Appendix A:  A Two Period Mathematical Model of Intergenerational
          Mobility...........................................................64

4  How Altruism is Influenced by Economic Status.............................72
     Intergenerational Substitution Effects in the Theory of Altruism........73
     The Formation of Altruism...............................................76
          Definition of Child-Oriented Resources.............................76
          The Effect of Altruism on Preferences..............................84
          "Total Resource" and "Substitution" Effects in the Permanent
               Income Model..................................................85
          Complementarity between Child-oriented Resources and a Child's
               Consumption...................................................90
          Parental Income and Substitution Effects in the Borrowing
               Constraints Model.............................................96
          Intergenerational Mobility with Endogenous Altruism...............101
     The Quantity and Quality of Intergenerational Altruism.................106
          Intergenerational Mobility and Preferences for Per Capita
               Consumption..................................................109
          How is Fertility Related to Family Income?........................110
          Aggregate and Per Capita Formulations of the Becker-Barro Model...112
          Additional Results................................................119
          A Model of Fertility and Child-Oriented Resources.................119
     Review of the Main Points..............................................121
          Predictions of the Models.........................................121
          A Theory of Preference Formation?.................................123
     Appendix B: Two Mathematical Models of the Formation of
          Intergenerational Altruism........................................124
     Appendix C: More on "total resource" and "substitution" effects........133

5  Taxation and Intergenerational Mobility in the Three Models..............137
     Estate and Gift Taxation...............................................138
          Flat-rate Taxes...................................................138
          Graduated-Rate Taxes..............................................139
          Summary of Theoretical Results....................................145
     Income Taxation........................................................145
          Flat-rate Taxes...................................................145
          Graduated-Rate Taxes..............................................147
          Summary of Theoretical Results....................................151
     Overview of the U.S. Estate, Gift, and Income Taxation.................151
          Federal Estate and Gift Taxes.....................................152
          Federal Income Taxes..............................................155
          Summary of the Relevant Features of U.S. Federal Estate, Gift,
               and Income Taxes.............................................157
     Review of the Main Results.............................................157

Part 2  Empirical Arguments for Modeling Altruism
6  The Evolution of Economic Inequality in the U.S..........................163
     Introduction...........................................................163
     Links Between Intergenerational Mobility and the Evolution of
          Inequality........................................................164
          Parental and Other Influences.....................................165
            and the Evolution of Inequality.................................167
          Galton's Fallacy and Inequality Across Groups.....................168
          Measurement Errors and the Evolution of Inequality................169
          Immigration, Intragenerational Mobility, and the Evolution of
               Inequality...................................................170
     Cross-family Inequality................................................171
          Wealth Inequality.................................................171
          Earnings Inequality...............................................174
          Consumption Inequality............................................176
     Racial Inequality......................................................177
     Cross-region Inequality................................................180
     Cross-country Inequality...............................................181
     A Unified Approach.....................................................182
     Review of the Main Points..............................................183

7  The Intergenerational Dynamics of Consumption, Earnings, Income,
          and Wealth........................................................186
     Introduction...........................................................186
     Intergenerationally Linked Data from the PSID..........................188
          Data Description..................................................188
          Intergenerational Samples Used in the Empirical Analysis..........189
          Measurement of Consumption........................................191
     PSID Results...........................................................193
     Results from other Data Sources........................................199
          Schooling.........................................................200
          Earnings..........................................................201
          Family Income.....................................................205
          Family Wealth.....................................................207
          Family Consumption................................................211
          Occupation........................................................211
     Review of the Main Results.............................................213
          Four Strongly Supported Conclusions...............................214
          Two Tentative Conclusions.........................................218
     Appendix D:  Some PSID Results with an Alternative Measure of
          Consumption.......................................................218

8  Borrowing Constraints and the Persistence of Inequality..................220
     Two Data Sources.......................................................226
     Simple Regression Results for Consumption..............................232
     Analysis of Selection Bias.............................................233
          Maximum Likelihood Estimates......................................234
          Pooled vs. Separate Regressions...................................235
          Growing Consumption Inequality in the Two Groups..................235
     Simple Regression Results for Wages....................................237
     Inheritance and Earnings Inequality....................................239
     Results from other Data Sources........................................241
          Parents Do Borrow Against the Earnings of Children................241
          Intergenerational Mobility Within and Across Groups...............242
          Cross-Country Comparisons of Intergenerational Mobility...........242
          Probate Records...................................................243
     Review of the Main Results.............................................246
     Appendix E:  Likelihood Functions Used in the Statistical Analysis.....248
     Appendix F:  Summary Statistics for PSID Samples.......................251

Part 3  Arguments from other Disciplines
9  The Biological Origins of Altruism.......................................259
     On Evolutionary Reasoning and Economic Analysis........................259
     An Altruism Function Derived From Evolutionary Reasoning...............263
          The Discriminating Altruist Corollary.............................263
          Kin Selection and the Rate of Return to Altruism..................265
          Rotten Kids and the Rate of Return to Altruism....................267
     Summary................................................................268

10  Classical Discussions of Altruism.......................................269
     Altruism is Formed as the Result of Costly Actions.....................269
     Altruism Increases with Schooling?.....................................271
     Smith Derives the "Interest Rate Effect"...............................272
     Summary................................................................272

11  Intergenerational Altruism and Inequality within the Family.............277
     Accumulating Altruism For Several Children.............................278
          Statement of the Full Problem.....................................278
          Setup of the Second Stage Problem.................................278
          Total Resource, Interest Rate, and Substitution Effects...........286
          "Relative Price of Giving" Effect.................................287
          "Relative Price of Caring" Effect.................................288
          "Relative Happiness" Effect.......................................289
     Do Parents Mitigate or Aggravate Inequality within the Family?.........292
          Mitigation of Inequality in the Standard Model....................292
          Endogenous Altruism Tends to Aggravate Inequality.................293
          Interpreting Evidence on Family Transfers.........................294
          Altruism and Insurance in the Family..............................296
          The Beggar's Strategy.............................................296
     Divorce, Parental Altruism and Child Welfare...........................297
          Price of Paternal Giving - Exogenous Altruism.....................299
          Paternal Altruism Formation.......................................301
          Other Applications................................................302
     Review of the Main Results.............................................302
     Appendix G:  A Mathematical Model of Altruism with Several Children....303

Part 4  Other Applications of Endogenous Altruism
12  Altruism and Giving Beyond the Family...................................306
     Government Transfers and Parental Altruism.............................307
          Education Subsidies...............................................307
          Government Guaranteed Consumption for Children....................309
          Combined Effects of Spending and Tax Programs.....................311
     Private Charities and Endogenous Impure Altruism.......................311
          Free-riding in Private Charities..................................312
          Endogenous Pure and Impure Altruism...............................312
          Predictions for the Financing of Public Goods.....................317
     Charitable Giving Over Time............................................318
     Summary of the Main Results............................................319
     Appendix H:  A Mathematical Model of Pure and Impure Altruism..........320

13  Altruism and the Principal-Agent Problem................................323
     The Standard Principal-Agent Problem...................................323
          Examples..........................................................323
          Computation of the Optimal Compensation Scheme....................324
     The Principal-Agent Problem with Endogenously Loyal Agents.............326
     Corporate Loyalty and Executive Compensation...........................327
     Review of the Main Results.............................................329
     Appendix I:  A Mathematical Model of Altruism and the Principal-Agent
          Problem...........................................................329

14  Conclusions.............................................................332
     A Model of the Formation of Parental Priorities........................332
     A Theory of Intergenerational Mobility.................................333
     Failures of Existing Economic Models...................................334
     Other Implications of Endogenous Altruism..............................336
     Problems With Altruism as a Motive for Human Behavior..................336
     Future Research on Altruism and Intergenerational Mobility.............338
          Testing Other Implications of the Theory..........................338
          New Models of Intergenerational Mobility..........................339
          New Models of Intergenerational Altruism..........................340
          New Data Sources..................................................341

A Guide to Mathematical Notation............................................343

References..................................................................349

Index.......................................................................361


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