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.