Intergenerational transfer of human capital and its impact on income mobility: Evidence from China

- This paper studies the impact of human capital transfer across generations on income mobility both theoretically and empirically.
- The theoretical analysis incorporates the direct and indirect transmission mechanisms into a classic OLG framework.
- The empirical analysis verifies the theoretical predictions using a simultaneous equations model based on the 1989-2009 CHNS data.
- We find that the intergenerational income mobility in China tends to be overestimated if the direct transfer of human capital is not accounted for.

This paper analyzes theoretically and empirically the impact of intergenerational transmission of human capital on the income mobility in China. We use a three-period overlapping-generations (OLG) model to show that the human capital transfer plays a remarkable role in determining the parent-to-offspring investment in human capital and the intergenerational elasticity of income. We then estimate a simultaneous equations model (SEM) using the 1989-2009 China Health and Nutrition Survey (CHNS) data to verify our theoretical predictions. The results show that (i) human capital, measured by health and education, is directly transmitted from one generation to the next, reflecting the parent-induced inequality of development opportunities among offspring in China; (ii) the estimated intergenerational income elasticity increases from 0.429 to 0.481 when the direct transfer of human capital is accounted for, suggesting that omitting this mechanism would overestimate China's income mobility. Our findings provide policy implications on strengthening human capital investments among the disadvantaged groups, reinforcing reforms that promote equality of opportunity, and improving the efficiency of labor markets in China.