Date of Original Version
Existing empirical work looking at the effects of parental income on IQ, schooling, wealth, race, and personality is only able to explain about half of the observed intergenerational income elasticity. This paper provides a possible behavioral explanation for this elasticity in which heterogeneous agents in sequential generations choose their education levels in the face of loss-averse preferences and weak borrowing constraints. These borrowing-constrained agents make education investment choices in part to avoid consumption losses rather than to maximize lifetime resources. The model generates a positive intergenerational income elasticity even when there are functioning capital markets to finance education investments. I find empirical support for the J-shape education decision rule generated by the model and show that it is mostly successful in matching the asymmetric intergenerational transition rates between income quintiles of white families.
Malloy, L. C. (2015). Loss aversion, education, and intergenerational mobility. Education Economics, 23(3), 318-337.
Available at: https://doi.org/10.1080/09645292.2013.823909