Parental Priorities and Economic Inequality

by Casey B. Mulligan

Chapter I

Outline of the Main Argument

Although inequality appears to be linked with the economy, politics, crime, and other items of substantial interest, its origins are not well understood. This book is about a potentially important source of inequality, the transmission of economic status from one generation to the next. The intergenerational transmission of economic status affects the evolution of inequality over time and the way in which government policies might alter the degree of inequality. Will blacks ever be as rich as whites? If so, when? How long does it take for immigrants to enjoy the success of native-born citizens? How long will the Northeast be the richest region of the United States? How long will Northern Italy be richer than Southern Italy? How do estate and income taxes affect inequality? Can education policies help children from poor families catch up with those from rich families? A theory of the evolution of inequality is necessary to answer these questions. The most important part of such a theory is a model of the intergenerational transmission of inequality.

I present some of the more standard and influential economic models of "intergenerational mobility" or the transmission of inequality from one generation to the next. The standard models emphasize opportunities (or lack of them) for families to borrow, save, and provide schooling for their children. I show that the models are inaccurate and suggest that they are very misleading in regards to the important forces determining intergenerational mobility. My approach to the problem is to model parental priorities by "endogenizing altruism." I answer questions such as "Which parents care more about their children's success?" I use the tools of economics to show how income, wages, taxes, interest rates, and other prices determine which parents are deeply concerned about their children's success and which parents are less concerned. I show how parental priorities translate into economic outcomes for the children and contrast my predictions with the predictions of other economic and noneconomic models. Endogenizing altruism not only delivers a better understanding of the evolution of inequality over time, but it also delivers predictions for a variety of other behavior.

Chapters 2 through 10 are concerned with modeling parental priorities and their relationship with intergenerational mobility. Some of these chapters are theoretical while others analyze a wide variety of data sources that relate to the intergenerational transmission of inequality. Chapters 11 through 13 apply my model of parental priorities to other human interactions, including the distribution of resources among siblings, charitable giving, and the principal-agent problem.

This book takes an economic approach to the problem, and this chapter contrasts this with other reasonable approaches to the issue at hand. One might say, however, that my approach is the modeling of "preferences" rather than the modeling of "incentives" or "markets" that is common practice in economics. Although I think my methods are very standard, it is true that by studying preferences I tackle something that most economists have left to anthropologists, biologists, or psychologists. The novelty of this has met with opposition from many economists, therefore this chapter concludes by addressing some of the criticisms of the methodology that have been raised by my colleagues.

© copyright 1996, Casey B. Mulligan.