Title: A new approach to estimate intergenerational mobility elasticities
Authors: Le Wang - University of Oklahoma (United States) [presenting]
Abstract: A nonparametric framework is provided for estimating intergenerational mobility elasticities (IGE) of children's income with respect to parental income. We allow the IGEs to be heterogeneous, by leaving the relationship of parental and child incomes unspecified, while acknowledging and addressing the latent nature of both child and parental permanent incomes and the resulted life-cycle bias. Our framework is a general nonparametric models that can accommodate non-classical measurement errors. Our framework enables us to propose a formal test of the widely imposed assumption that the intergenerational mobility function is linear. Applying our method to the Panel Studies of Income Dynamics (PSID) data, we decisively reject the commonly imposed linearity assumption and find substantial heterogeneity in the IGEs across the population. The IGEs with respect to parental income exhibit a U-shape pattern. Specifically, there is a considerable degree of mobility among the broadly defined middle class, but the children of both high- and low-income parents are more likely to be high- and low-income adults, respectively. Our result suggests that the U.S. is indeed a ``land of opportunity'', just not for everyone! This result also provides valuable insights into the (intertemporal) Great Gatsby curve, suggesting that a higher level of inequality within one generation may lead to a higher level of social immobility in the next generation in the U.S..