Altruism, Education and Inequality in the United States

Defense Date: 19/01/2009Examining Board: Prof. Alexander Michaelides, London School of Economics Prof. Claudio Michelacci, CEMFI Madrid Prof. Salvador Ortigueira, EUI Prof. Morten Ravn, EUI, supervisorThis thesis contains several lines of research conducted during my four years at the European University Institute. It consists of three chapters that analyze the link between parental inter-vivos transfers, education and inequality. In the first chapter, "Accounting for the Changing Role of Family Income in Determining College Entry", I present a computable dynamic general equilibrium model with overlapping generations and incomplete markets and I use this model to measure the fraction of households constrained in their college entry decision. College education is financed by family transfers and public subsidies, where transfers are generated through altruism on part of the parents. Parents face a trade-off between making transfers to their children and own savings. Ceteris paribus, parents who expect lower future earnings transfer less and save more. Data from the 1986 Survey of Consumer Finances give support to this mechanism. I show that this trade-off leads to substantially higher estimates of the fraction of constrained households compared to the results in the empirical literature (18 instead of 8 percent). The model also predicts that an increment in parents' earnings uncertainty decreases their willingness to provide transfers. In combination with rising returns to education, which makes college going more attractive, this boosts the number of constrained youths and explains why family income has become more important for college access over the last decades in the U.S. economy. In chapter two, titled "Why Do the Rich Save More: The Role of Housing", I analyze the determinants of the wealth-income gradient with educational attainment that is observable in the data. This gradient is very steep: using the 1989 wave of the Survey of Consumer Finances (SCF), I find the median college graduate near retirement age holds twice as much wealth as the median high school dropout. In this paper, I argue that housing plays an important role for explaining the wealth-income gradient that is observable in the data. The last chapter, "Parental Transfers and Parental Income: Does the Future Matter More Than the Present?" adds to the results that were derived in the first chapter. More precisely, I present a model of parental transfers that is based on the assumption of one sided altruism. I use this model to analytically study the link between parental expectations about their future resources and their present transfer behavior. In the context of my model, I show that parents with brighter earnings prospects are willing to transfer more to their o spring already today, all other things equal