Human capital spill-overs and the geography of intergenerational mobility

Abstract

We develop and estimate an equilibrium model of geographic variation in the intergenerational elasticity of earnings (IGE). The theory extends the Becker–Tomes model, introducing a production sector in which workers' human capital inputs are complements. In this setting the return to parental human capital investments is lower where skill complementarity is more intense, and this is reflected in less intergenerational persistence. We also show that education subsidies may be more desirable where skill complementarities are stronger, endogenously leading to a negative correlation between progressive public policy and IGE. Using microdata we construct location-specific measures of skill complementarity and document that patterns of geographic variation in IGE are consistent with this hypothesis. Geographic differences in skill complementarity directly account for roughly one fifth of cross-country variation in IGE, and possibly more if one allows for the indirect effect through government expenditure in public education.