Productivity-rent effects in intergenerational transfers: Education versus bequests

This paper studies optimal intergenerational transfers when altruistic parents can transfer resources to their children through financial bequests or through investment in human capital. The key distinction is that education is a productive transfer: it changes the mapping from privately observed ability to output, whereas bequests are budgetary transfers. The paper characterizes how this distinction affects information rents in a dynastic Mirrlees environment. The main result is a decomposition of the informational effect of education relative to bequests. With endogenous labor supply, both instruments affect incentive provision through marginal-utility and labor-supply responses. Education, however, generates an additional productivity-rent component governed by the cross-partial between ability and human capital in production. This component is absent for purely budgetary transfers. When ability and human capital are sufficiently complementary, the productivity-rent component can dominate the standard labor-requirement channel, so that education may be optimally distorted downward relative to the bequest margin. The analysis clarifies why education and bequests are not equivalent instruments of intergenerational redistribution. The difference is not only that education has risky returns, but also that it changes the sensitivity of output to privately observed ability. This distinction provides a force that can work against the standard education-subsidy logic in Mirrlees models.