Accounting for the Trends in Inequality and Intergenerational Mobility in the U.S.

We analyze the relation between the increase in inequality and the observed trends in intergenerational mobility in the U.S. in the last three decades. As an empirical contribution, we document a significant increase in the intergenerational elasticity of earnings, both at the family level and at the individual level between 1977 and 2008. We then build a dynamic, overlapping generations model with altruism, life-cycle features, stochastic earnings and borrowing constraints for parental investments in the human capital of their offsprings. We use the model to answer the question of whether changes in the earnings process calibrated from the U.S. data can simultaneosuly account for the trends in inequality and intergenerational mobility, while being consistent with the changes in educational attainment and the increasing correlation between college completion and parental income.