Intergenerational earnings mobility: A new decomposition of investment and endowment effects

This paper investigates the contribution of investments and endowments in generating intergenerational persistence in earnings. The empirical analysis involves the estimation of a theoretical model where log-earnings of children are determined by the log-earnings of parents and two sources of randomness arising from labor market and endowment shocks. An important feature of the model is that it predicts a nonlinear relationship between earnings across generations, thereby providing support for nonlinear specifications adopted previously. Using PSID data on father–son pairs in the US over the period 1968 to 2005, the results show that about one-third of the intergenerational earnings elasticity arises from investments with the remaining two-thirds coming from endowments. The results also show that the relative decomposition varies with log-earnings of fathers, with the investment effect dominating the endowment effect at low incomes and the reverse occurring at high incomes.