Intergenerational mobility is often seen as a measure of equality of opportunity: if a child from a poor background obtains a ‘good position’ when adult this may be because he/she was clever and that abilities pay. Traditionally the United States have been viewed as a highly mobile society and this contributes to the popular view of an ‘American Dream’. At the same time, this country has also the most unequal distribution of income among developed countries.
In that case, inequality may hamper mobility by deterring investment in human capital if credit markets are imperfect. This is where a case for public education can be made on ‘equality of opportunity’ and intergenerational mobility (IM) grounds. Most European countries have a large share of their education system publicly financed and centrally provided this translates by a more homogeneous distribution of income. Because in a publicly financed system, credit constraints should not hamper educational choices, it should be easier for poor families in Europe to invest in their child’s human capital. This is illustrated by the possibility of a relatively poor born child with above average ability being unable to afford much education in a private system while being able in a public system. Hence, most theoretical models posit a positive relationship between income equality and mobility (see Becker and Tomes 1986, 1979; Loury 1981, Owen and Weil 1998).
The intuition being that when inequality increases the uneducated are more likely to be credit constraint and hence less likely to be able to invest in human capital, which in turn hamper their prospect of upward mobility. However, there is empirical evidence that equality and mobility may be negatively linked. This was documented for instance by Checchi, Ichino and Rustichini (1999), that find that while Italy is more equal than the US it is however less mobile in terms of both educational status and income. Erickson and Goldthorpe (1992) find that France is less mobile than US, while France has also a more equal distribution of income.
In these two European countries, educational expenditures are mostly publicly financed and centrally provided. Proposed model of education, based on credit constraints, fail to explain the negative relationship between inequality and mobility when education is public. This paper proposes a model that compares mobility and inequality in both financing regimes and argues that the negative relationship between inequality and mobility may be due to different impact of intergenerational altruism under different financing systems. Going to school modifies the degree of altruism by making agents more self-confident about the prospect of upward mobility of their child. Private education may be more attractive for altruistic agents if they can adapt their expenditure according to their child’s anticipated talent, or say their prospect of upward mobility.
In our model, public education equalizes opportunities by offering an homogeneous quality of education to all students that choose to acquire it. Education quality is endogenously determined by parents through their voting. Students are assumed to have heterogeneous ability independent of wealth but linked to parental ability. Public education is compared to a private education where parents can choose their educational expenditures independently of other agents, depending only on their own income and level of self-confidence. I will focus on the aggregate level of mobility and inequality in both regimes. An important aspect of the paper is its treatment of agent heterogeneity regarding talent.
Most papers consider talent as shocks that are identically and idependently distributed (iid). Here I assume that talent is not perfectly observable, and that agents have different beliefs regarding their talent stemming from their mobility trajectories (as in Piketty, 1996 or Checchi et al., 1999). Since talent is observable only through the educational outcome an important by-product of attending school for an agent is discovering his talent and accumulating self-confidence over his child’s talent. We first show that while public education offersmore education at a lower price to poor families, it may however fail in providing enough incentives for agents to exert higher effort. Within the altruistic family nexus agents also take into consideration how their actions are suitable to fullfil their altruistic motives. I find that if the return to effort is important enough, the incentive component of inequalities overcomes credit constraints and private education generate more IM. This mechanism works through the accumulation of self-confidence. If talent is correlated across generations, optimistic agents are willing to spend more on their child’s education than pessimistic agents.
The financing regime of education has also implications for between group and within group inequality. Within group inequality is lower in a public system and between group inequality may be higher. This is due to the equalizing effect of public education among the educated. This goes through two channels namely a more homogeneous distribution of education quality and effort in a public system. However, since redistribution through education benefits only those who get educated, and that total human capital produced by the educational system is lower in a public financed regime, public education may lead to higher between groups inequality.
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