An Economic Theory of Intergenerational Coresidence

In the mid-nineteenth century, almost 70 percent of persons aged 65 or older resided with their adult children; by the end of the twentieth century, less than 15 pecent did so. Recent theories have argued that the decline in intergenerational coresidence resulted primarily from an increase in income that enabled individuals to afford independent living. We propose a different theory: the shift of the economy from agriculture to services and the rise in the returns from education have reduced the role of the family and increased the role of the market in determining the outcomes of the young generation. We use IPUMS data over the period 1850-2000 to calibrate a model in which the future prospects of the young generation are determined by a combination of family capital, mainly social connections and network, and human capital. Coresidence is a way to build family capital but may interfere with the accumulation of human capital. We show that the rise in the returns to education induced a shift from family to human capital that can well account for the decline in intergenerational coresidence experienced in US over the last century. The crossectional implications of the model strongly differentiate our theory from previous ones and are well supported by the data.