Market competition and parental background wage premium: the role of human and relational capital

The literature on intergenerational inequality has not inquired so far the role that market competition can play in the intergenerational transmission process. In this article we assess this role from both an empirical and a theoretical perspective. From the empirical side, using a panel dataset on Italian workers, we find that the parental background wage premium significantly decreases when sector competition increases. This result is challenging and might signal that part of the intergenerational transmission of inequalities is related to non-productive abilities transmitted by parents – that we call relational capital – rewarded thanks to rents arising in non-competitive markets. However, parental background might hide both relational capital and unobservable abilities and we cannot exclude that some workers’ unobservable abilities are more rewarded in less competitive industries, even if further analyses run to deal with this issue lend support to the idea that relational capital plays a not negligible role. From the theoretical side, we propose a model – whose predictions are consistent with our findings – that sheds light on the crucial role played by the intergenerationally transmitted relational capital in rent-seeking activities by firms when markets are non-competitive.