Economic Interpretations of Intergenerational Correlations

Since accurate prediction ultimately determines the usefulness of theory, our paper gives the reader a taste of some predictions derived from economic theory and some empirical successes and failures. We provide only a taste, because there are a great many economic models relevant to intergenerational correlations— such as models of educational attainment, neighborhood effects in schooling, family formation and fertility choice, occupational choice and discrimination—and quite a variety of predictions that might be derived from these models. However, a simple model of investment and intergenerational decision making can be interpreted as a conceptual aggregation of many more detailed economic models. We present such a model and from it derive one class of predictions that has received substantial attention in the empirical literature—the role of endowments and credit markets in determining intergenerational correlations.