Haves and have nots

Kevin Lewis

August 23, 2019

Does Intergenerational Mobility Increase Corporate Profits?
James Albertus & Michael Smolyansky
Federal Reserve Working Paper, July 2019

We find that firms located in areas with higher intergenerational mobility are more profitable. Building off the work of Chetty and Hendren (2018a and 2018b) - who provide measures of intergenerational mobility for all commuting zones (essentially, metropolitan areas) within the U.S. - we are the first to show the positive link between intergenerational mobility and corporate profitability. Our regressions compare firms within the same industry at the same point in time and fully control for time-varying state-level shocks. As such, our findings cannot be explained by either differences in industry composition across localities or by variation in state-level economic conditions; nor can our results be explained by differences in firm characteristics or by local economic conditions. Rather, we present evidence for a human-capital-based explanation: areas with higher mobility do a better job in unlocking people’s innate talents, which in turn has a positive effect on the performance of firms headquartered in these locations. Our results therefore show that greater equality of opportunity is associated with increased corporate profitability.

The More You Have, the More You Want? Higher Social Class Predicts a Greater Desire for Wealth and Status
Zhechen Wang, Jolanda Jetten & Niklas Steffens
European Journal of Social Psychology, forthcoming

Traditional theories have focused on the intentions of lower‐class individuals to climb on the social ladder, yet they have paid relatively little attention to the motivations of upper‐class individuals to ascend even higher. Addressing this issue, Studies 1 and 2 provided cross‐national evidence that higher social class is associated with a greater desire for wealth and status. Moreover, by manipulating perceived social class, Studies 3 and 5 experimentally confirmed that compared to people in the lower‐class group, those in the upper‐class group express a stronger desire for wealth and status. Furthermore, in line with self‐categorization theory predictions, Studies 3‐5 showed that upper‐class individuals tend to see and use wealth and status as important attributes in defining and categorizing self, and such tendency explains the effect of social class on desire for wealth and status. Together, our findings demonstrate a “having more-wanting more” relationship, and its consequences are further discussed.

Poor Little Rich Kids? The Role of Nature versus Nurture in Wealth and Other Economic Outcomes and Behaviors
Sandra Black et al.
Review of Economic Studies, forthcoming

Wealth is highly correlated between parents and their children; however, little is known about the extent to which these relationships are genetic or determined by environmental factors. We use administrative data on the net wealth of a large sample of Swedish adoptees merged with similar information for their biological and adoptive parents. Comparing the relationship between the wealth of adopted and biological parents and that of the adopted child, we find that, even prior to any inheritance, there is a substantial role for environment and a much smaller role for pre-birth factors and we find little evidence that nature/nurture interactions are important. When bequests are taken into account, the role of adoptive parental wealth becomes much stronger. Our findings suggest that wealth transmission is not primarily because children from wealthier families are inherently more talented or more able but that, even in relatively egalitarian Sweden, wealth begets wealth. We further build on the existing literature by providing a more comprehensive view of the role of nature and nurture on intergenerational mobility, looking at a wide range of different outcomes using a common sample and method. We find that environmental influences are relatively more important for wealth-related variables such as savings and investment decisions than for human capital. We conclude by studying consumption as an overall measure of welfare and find that, like wealth, it is more determined by environment than by biology.

Fraying Families: Demographic Divergence in the Parental Safety Net
Heeju Sohn
Demography, August 2019, Pages 1519-1540

Parents are increasingly supporting their children well into adulthood and often serve as a safety net during periods of economic and marital instability. Improving life expectancies and health allows parents to provide for their children longer, but greater union dissolution among parents can weaken the safety net they can create for their adult children. Greater mortality, nonmarital childbearing, and divorce among families with lower socioeconomic status may be reinforcing inequalities across generations. This article examines two cohorts aged 25-49 from the 1988 (n = 7,246) and 2013 (n = 7,014) Panel Study of Income Dynamics Roster and Transfers Files. In 1988, adults with a college degree had two surviving parents living together for 1.8 years longer than nongraduates. This disparity increased to 6.8 years in 2013. This five-year increase in disparity was driven predominantly by higher rates of union dissolution among parents of adults with less education. Growing differences in paternal mortality also contributed to the rise in inequality.

The End of the American Dream? Inequality and Segregation in US Cities
Alessandra Fogli & Veronica Guerrieri
NBER Working Paper, August 2019

Since the '80s the US has experienced not only a steady increase in income inequality, but also a contemporaneous increase in residential segregation by income. Using US Census data, we first document a positive correlation between inequality and segregation at the MSA level between 1980 and 2010. We then develop a general equilibrium overlapping generations model where parents choose the neighborhood where to raise their children and invest in their children's education. In the model, segregation and inequality amplify each other because of a local spillover that affects the returns to education. We calibrate the model using 1980 US data and the micro estimates of the effect of neighborhood exposure in Chetty and Hendren (2018). We then assume that in 1980 an unexpected permanent skill premium shock hits the economy and show that segregation contributes to 28% of the subsequent increase in inequality.

Income Growth and the Distributional Effects of Urban Spatial Sorting
Victor Couture et al.
NBER Working Paper, August 2019

We explore the impact of rising incomes at the top of the distribution on spatial sorting patterns within large U.S. cities. We develop and quantify a spatial model of a city with heterogeneous agents and nonhomothetic preferences for locations with different amenities of endogenous quality. As the rich get richer, their increased demand for luxury amenities available downtown drives housing prices up in downtown areas. The poor are made worse off, either being displaced or paying higher rents for amenities that they do not value as much. Endogenous provision of private amenities amplifies the mechanism, while public provision of other amenities in part curbs it. We quantify the corresponding impact on well-being inequality. Through the lens of the quantified model, the change in the income distribution between 1990 and 2014 led to neighborhood change and spatial resorting within urban areas that increased the welfare of richer households relative to that of poorer households by an additional 1.7 percentage points on top of their differential income growth.

Schooling Investment, Mismatch, and Wage Inequality
Andrew Shephard & Modibo Sidibe
University of Pennsylvania Working Paper, July 2019

This paper examines how policies, aimed at increasing the supply of education in the economy, affect the matching between workers and firms, and the wages of various skill groups. We build an equilibrium model where workers endogenously invest in education, while firms direct their technology toward skill intensive production activities. Search frictions induce mismatch on both extensive (unemployment) and intensive (over-education) margins, with ensuing wage consequences. We estimate the model using NLSY and O*NET data, and propose an ex-ante evaluation of prominent educational policies. We find that higher education cost subsidies boost college attainment, produce substantial welfare gains in general equilibrium, but increase wage inequality. These changes are associated with a substantial upward shift in the distribution of job complexity, which leads to worse allocations for high-school graduates who end up under-educated in less productive firms, while highly-educated workers match with more productive firms and experience less over-education during their careers.

Inequality and Financial Fragility
Yuliyan Mitkov
Journal of Monetary Economics, forthcoming

I study how the distribution of wealth influences the government’ s response to systemic banking crises and shapes financial fragility. Distributional concerns tend to make full government guarantees of deposits credible for relatively poor individuals, but not for wealthier individuals. As a result, wealthier individuals have a stronger incentive to panic and, in equilibrium, the institutions in which they invest are endogenously more likely to experience runs and receive partial bailouts, even under utilitarian government. Moreover, the shape of the wealth distribution affects the level of financial fragility. Recognizing this fact may alter the government’s desire to redistribute wealth ex ante.

Coveting your neighbour’s house: Understanding the positional nature of residential satisfaction
Daniel Kuhlmann
Housing Studies, forthcoming

Do the characteristics of our neighbour’s house affect how we view our own home? In this paper, I examine the importance of local comparisons in housing assessments by testing whether the size of one’s home relative to others in their neighbourhood influences their housing satisfaction. I use a unique feature of the 1993 American Housing Survey, in which the US Census Bureau randomly surveyed 988 housing units around the country and a cluster of approximately 10 of their nearest neighbours. I use these data to test whether a unit’s relative size in its neighbourhood influences the occupant’s housing satisfaction while controlling for a series of occupant and unit characteristics. I find evidence that relative position matters. Those living in comparatively small houses are more likely to express dissatisfaction with their home than people living in units that are large relative to other houses in their neighbourhood cluster.

Overwork, Specialization, and Wealth
Brian Aronson & Lisa Keister
Journal of Marriage and Family, forthcoming

Objective: This study examines how overwork and traditional household specialization - defined as households with one dedicated female homemaker and one dedicated male breadwinner - are associated with wealth across socioeconomic strata.

Method: With data from the Survey of Consumer Finances, a nationally representative survey of households that includes an oversample of high‐wealth households, the authors estimate unconditional quantile regression models to investigate how overwork and household specialization are associated with household wealth across socioeconomic strata and over time.

Results: Overwork has the greatest absolute benefits at the top of the wealth distribution but the greatest relative benefits in lower portions of the wealth distribution. Specialization yields distinct advantages for high‐wealth households that have grown over time, whereas specialization comes with trade‐offs for low‐wealth households that outweigh its benefits.

Rurality and Income Inequality in the United States, 1975-2015
Thomas Hertz & Andrew Silva
Rural Sociology, forthcoming

Recent events have focused attention on the perceived widening of the economic divide between urban and rural areas, and on the continued rise of national income inequality. We demonstrate that, in fact, the average income gap between urban (metropolitan) and rural (nonmetropolitan) households has not risen over the past 40 years, and makes virtually no contribution to national income inequality. Rising national inequality is driven by rising inequality within both urban and rural America, not by an urban/rural divergence. As is well known, the growing dispersion of household money income is partly driven by rising wage inequality, particularly in urban areas. Less well recognized is the role played by other income sources. We show that a decline in the progressivity of the distribution of social security payments and cash transfers, and an increase in the regressivity of the distribution of retirement incomes, have jointly made a comparably large contribution to rising income inequality. At the same time, the share of income from self‐employment has declined, particularly in rural America, and because self‐employment income is very unequally distributed, its diminution has retarded the growth of rural inequality. In 2014-15, however, rural inequality increased, cutting the urban/rural inequality gap in half.

Institutional persistence, income inequality, and individual attitudes
Alberto Chong & Mark Gradstein
Journal of Economic Inequality, September 2019, Pages 401-413

Aspects of institutional quality vary substantially across countries, but are quite persistent over time. Further, institutional quality is correlated with income inequality, even among democracies. To account for these regularities, we offer a model where individual attitudes, toward inequality or trust in government, feature in voters’ preferences. The model displays path dependence, whereby inequality and institutional quality feed each other. It is suggested that this may explain the long shadow of historical legacies of postcolonial experiences. Simple correlations of reported attitudes using data from the World Values Surveys are consistent with the model.

Intergroup inequality and the breakdown of prosociality
Rustam Romaniuc et al.
Economics of Governance, September 2019, Pages 285-303

Each year about 60 million people flee their home country and seek to cross into developed countries, thus urging the latter to develop different policy responses to face the growing concerns about how immigration may affect social order. We design a novel two-part public goods experiment with radical income asymmetry between groups to investigate how voting on (not) helping less-endowed others affects pro-social behavior in the voting groups. We find that no group ever votes to help less-endowed ones. This, in turn, results in a breakdown of prosociality within the voting groups. We study the reasons why the implementation of voting - compared to no voting or to imposed solidarity - results in a significant, negative impact on cooperation levels within the voting groups.


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