Parental Priorities and Economic Inequality
by Casey B. Mulligan
Detailed Table of Contents
List of Illustrations........................................................ix
List of Tables.............................................................xiii
Acknowledgments..............................................................xv
1 The Argument for Parental Priorities.......................................1
Altruistic Parental Priorities...........................................2
Two Models of Opportunity and Intergenerational Mobility.................3
How Altruism is Influenced by Economic Status............................3
Evidence on the Dynamics of Economic Inequality..........................4
Arguments from Other Disciplines.........................................6
Other Implications of Endogenous Altruism................................6
Choice and the Economic Approach.........................................7
On the Methodology of Endogenizing Preferences...........................9
Part 1 Modeling Altruism and Intergenerational Mobility
2 Indifference Curve Diagrams as Models of Parental Priorities..............13
Altruism................................................................14
Timing of Parental and Child Consumption................................14
Indifference Curve Diagrams.............................................16
Intergenerational Altruism..............................................18
Altruism and Economic Status............................................19
Summary.................................................................21
3 Two Models of Opportunity and Intergenerational Mobility..................23
Introduction............................................................23
The Permanent Income View of Intergenerational Mobility.................26
Economic Opportunities with Exogenous Earnings.....................26
The Transmission of Inequality with Exogenous Earnings.............30
Opportunities and Inequality with Parental Investments in Children.38
Review of the Main Points..........................................44
The Imperfect Capital Markets View......................................45
Opportunities with an Intergenerational Borrowing Constraint.......47
Transmission of Consumption Inequality.............................48
Transmission of Earnings Inequality................................54
Human Capital, Ability and Family Background.......................55
Are the Permanent Income and Imperfect Capital Markets Models
Different?....................................................57
Review of the Main Points..........................................62
Appendix A: A Two Period Mathematical Model of Intergenerational
Mobility...........................................................64
4 How Altruism is Influenced by Economic Status.............................72
Intergenerational Substitution Effects in the Theory of Altruism........73
The Formation of Altruism...............................................76
Definition of Child-Oriented Resources.............................76
The Effect of Altruism on Preferences..............................84
"Total Resource" and "Substitution" Effects in the Permanent
Income Model..................................................85
Complementarity between Child-oriented Resources and a Child's
Consumption...................................................90
Parental Income and Substitution Effects in the Borrowing
Constraints Model.............................................96
Intergenerational Mobility with Endogenous Altruism...............101
The Quantity and Quality of Intergenerational Altruism.................106
Intergenerational Mobility and Preferences for Per Capita
Consumption..................................................109
How is Fertility Related to Family Income?........................110
Aggregate and Per Capita Formulations of the Becker-Barro Model...112
Additional Results................................................119
A Model of Fertility and Child-Oriented Resources.................119
Review of the Main Points..............................................121
Predictions of the Models.........................................121
A Theory of Preference Formation?.................................123
Appendix B: Two Mathematical Models of the Formation of
Intergenerational Altruism........................................124
Appendix C: More on "total resource" and "substitution" effects........133
5 Taxation and Intergenerational Mobility in the Three Models..............137
Estate and Gift Taxation...............................................138
Flat-rate Taxes...................................................138
Graduated-Rate Taxes..............................................139
Summary of Theoretical Results....................................145
Income Taxation........................................................145
Flat-rate Taxes...................................................145
Graduated-Rate Taxes..............................................147
Summary of Theoretical Results....................................151
Overview of the U.S. Estate, Gift, and Income Taxation.................151
Federal Estate and Gift Taxes.....................................152
Federal Income Taxes..............................................155
Summary of the Relevant Features of U.S. Federal Estate, Gift,
and Income Taxes.............................................157
Review of the Main Results.............................................157
Part 2 Empirical Arguments for Modeling Altruism
6 The Evolution of Economic Inequality in the U.S..........................163
Introduction...........................................................163
Links Between Intergenerational Mobility and the Evolution of
Inequality........................................................164
Parental and Other Influences.....................................165
and the Evolution of Inequality.................................167
Galton's Fallacy and Inequality Across Groups.....................168
Measurement Errors and the Evolution of Inequality................169
Immigration, Intragenerational Mobility, and the Evolution of
Inequality...................................................170
Cross-family Inequality................................................171
Wealth Inequality.................................................171
Earnings Inequality...............................................174
Consumption Inequality............................................176
Racial Inequality......................................................177
Cross-region Inequality................................................180
Cross-country Inequality...............................................181
A Unified Approach.....................................................182
Review of the Main Points..............................................183
7 The Intergenerational Dynamics of Consumption, Earnings, Income,
and Wealth........................................................186
Introduction...........................................................186
Intergenerationally Linked Data from the PSID..........................188
Data Description..................................................188
Intergenerational Samples Used in the Empirical Analysis..........189
Measurement of Consumption........................................191
PSID Results...........................................................193
Results from other Data Sources........................................199
Schooling.........................................................200
Earnings..........................................................201
Family Income.....................................................205
Family Wealth.....................................................207
Family Consumption................................................211
Occupation........................................................211
Review of the Main Results.............................................213
Four Strongly Supported Conclusions...............................214
Two Tentative Conclusions.........................................218
Appendix D: Some PSID Results with an Alternative Measure of
Consumption.......................................................218
8 Borrowing Constraints and the Persistence of Inequality..................220
Two Data Sources.......................................................226
Simple Regression Results for Consumption..............................232
Analysis of Selection Bias.............................................233
Maximum Likelihood Estimates......................................234
Pooled vs. Separate Regressions...................................235
Growing Consumption Inequality in the Two Groups..................235
Simple Regression Results for Wages....................................237
Inheritance and Earnings Inequality....................................239
Results from other Data Sources........................................241
Parents Do Borrow Against the Earnings of Children................241
Intergenerational Mobility Within and Across Groups...............242
Cross-Country Comparisons of Intergenerational Mobility...........242
Probate Records...................................................243
Review of the Main Results.............................................246
Appendix E: Likelihood Functions Used in the Statistical Analysis.....248
Appendix F: Summary Statistics for PSID Samples.......................251
Part 3 Arguments from other Disciplines
9 The Biological Origins of Altruism.......................................259
On Evolutionary Reasoning and Economic Analysis........................259
An Altruism Function Derived From Evolutionary Reasoning...............263
The Discriminating Altruist Corollary.............................263
Kin Selection and the Rate of Return to Altruism..................265
Rotten Kids and the Rate of Return to Altruism....................267
Summary................................................................268
10 Classical Discussions of Altruism.......................................269
Altruism is Formed as the Result of Costly Actions.....................269
Altruism Increases with Schooling?.....................................271
Smith Derives the "Interest Rate Effect"...............................272
Summary................................................................272
11 Intergenerational Altruism and Inequality within the Family.............277
Accumulating Altruism For Several Children.............................278
Statement of the Full Problem.....................................278
Setup of the Second Stage Problem.................................278
Total Resource, Interest Rate, and Substitution Effects...........286
"Relative Price of Giving" Effect.................................287
"Relative Price of Caring" Effect.................................288
"Relative Happiness" Effect.......................................289
Do Parents Mitigate or Aggravate Inequality within the Family?.........292
Mitigation of Inequality in the Standard Model....................292
Endogenous Altruism Tends to Aggravate Inequality.................293
Interpreting Evidence on Family Transfers.........................294
Altruism and Insurance in the Family..............................296
The Beggar's Strategy.............................................296
Divorce, Parental Altruism and Child Welfare...........................297
Price of Paternal Giving - Exogenous Altruism.....................299
Paternal Altruism Formation.......................................301
Other Applications................................................302
Review of the Main Results.............................................302
Appendix G: A Mathematical Model of Altruism with Several Children....303
Part 4 Other Applications of Endogenous Altruism
12 Altruism and Giving Beyond the Family...................................306
Government Transfers and Parental Altruism.............................307
Education Subsidies...............................................307
Government Guaranteed Consumption for Children....................309
Combined Effects of Spending and Tax Programs.....................311
Private Charities and Endogenous Impure Altruism.......................311
Free-riding in Private Charities..................................312
Endogenous Pure and Impure Altruism...............................312
Predictions for the Financing of Public Goods.....................317
Charitable Giving Over Time............................................318
Summary of the Main Results............................................319
Appendix H: A Mathematical Model of Pure and Impure Altruism..........320
13 Altruism and the Principal-Agent Problem................................323
The Standard Principal-Agent Problem...................................323
Examples..........................................................323
Computation of the Optimal Compensation Scheme....................324
The Principal-Agent Problem with Endogenously Loyal Agents.............326
Corporate Loyalty and Executive Compensation...........................327
Review of the Main Results.............................................329
Appendix I: A Mathematical Model of Altruism and the Principal-Agent
Problem...........................................................329
14 Conclusions.............................................................332
A Model of the Formation of Parental Priorities........................332
A Theory of Intergenerational Mobility.................................333
Failures of Existing Economic Models...................................334
Other Implications of Endogenous Altruism..............................336
Problems With Altruism as a Motive for Human Behavior..................336
Future Research on Altruism and Intergenerational Mobility.............338
Testing Other Implications of the Theory..........................338
New Models of Intergenerational Mobility..........................339
New Models of Intergenerational Altruism..........................340
New Data Sources..................................................341
A Guide to Mathematical Notation............................................343
References..................................................................349
Index.......................................................................361
© copyright 1997 by The University of Chicago