Abilities, Budgets and Age: Inter-Generational Economic Mobility in Finland

TLDR: In this article, two distinct explanations have been postulated for the observed positive correlation between incomes of children and those of their parents: parental wealth may restrict investment in human capital of children, or unobserved abilities that are positively associated with earnings may be passed between generations, either genetically or through the home environment, resulting in an auto-regressive process in earnings across generations.

Abstract: The authors are most grateful to the Academy of Finland for partial funding of this study under project number 52198. Two distinct explanations have been postulated for the observed positive correlation between incomes of children and those of their parents. Where credit constraints are prevalent, parental wealth may restrict investment in human capital of children. Alternatively, unobserved abilities that are positively associated with earnings may be passed between generations, either genetically or through the home environment, resulting in an auto-regressive process in earnings across generations. Empirical distinction between these two hypotheses has proved elusive. A model combining both features is outlined and estimated here. The data are drawn from a very remarkable and largely unexplored panel encompassing the entire Finnish