Does Money Matter for Intergenerational Income Transmission?

Abstract

The intergenerational income elasticity (IIE) is a crucial measure of income mobility. In this article, we develop a structural model to examine the channels through which this elasticity operates. Using data from the Panel Study of Income Dynamics, we separately identify the human capital and the financial components. The human capital component examines the transmission of human capital, independent of financial investments, whereas the financial component examines the impact of income that is uncorrelated with human capital, that is, exogenous income. Using a two‐stage framework, we show that the IIE operates through both channels. Moreover, our estimates show that the financial component may have a larger effect than previously estimated, plausibly attributing to 36% of intergenerational income transmission. Indeed, this result holds even when the financial component is defined in an incredibly narrow manner. This suggests that cash payments could promote intergenerational mobility.