The channels of influence of parents background on children's earnings: the role of human and relational capital in monopolistic competition

The accumulation of human capital is considered the main channel through which parents background influences their children's earnings. The possibility that parents affect their children's prospects through channels not directly related to productivity i.e., their relational capital is usually neglected. Indeed, we lack a theory explaining why firms may reward relational capital and how this affects the intergenerational transmission of inequality. In this article, we aim to fill these gaps by explaining why parents background can affect their children's earnings through channels other than human capital. We set up a theoretical model of monopolistic competition where relational capital is a further determinant of workers' earnings. We show that the premium for human capital is higher as the sector of employment is more competitive, while the opposite holds for relational capital. Parental background is associated with both unobservable human capital and relational capital. Therefore, we can rely on our model's predictions to establish whether the influence of parental background beyond the influence through education is due to unobservable abilities rather than to family networks. We test these predictions for Italy and find that the additional background premium, which is not negligible, seems to depend more on relational capital than on unobservable components of human capital because it decreases when sector competition increases.