Economic Inequality and the Provision of Schooling

[...]What might account for this link between parentalincome and children’s income? Many economists believethat this relationship is due in large part to differentialhuman-capital investment between high-income andlow-income families. High-income parents can invest inmore (and better) education for their children, in a mannerthat low-income parents cannot, due to credit marketimperfections. Since credit markets are imperfect, becauseparents cannot borrow against their children’s futureearnings to finance human-capital investment, low-incomeparents may face binding liquidity constraints and, consequently,may underinvest in their children’s human capital(Loury 1981; Becker and Tomes 1986; Mulligan 1995).This is only one possible explanation, however, and maycarry less weight given Shea’s finding that parental moneyper se does not matter in determining their children’soutcomes.[...]