Parental Time Investment and Human Capital Formation: A Quantitative Analysis of Intergenerational Mobility

A large literature has documented low intergenerational mobility in the U.S. over the last few decades, prompting a growing interest in understanding mechanisms underlying intergenerational mobility. In this paper, I construct a quantitative general equilibrium model that explores parental time investment in preschool-aged and younger children as a channel through which economic status can be transmitted intergenerationally. Altruistic parents differ in their own human capital and assets, and in the human capital of their children. They each decide how to split their time across investment in their child's human capital, market work, and leisure. My calibrated model reproduces several measures of intergenerational income mobility, as well as the lifecycle inequality seen in U.S. data. Decomposing its results, I find that the parental time investment channel accounts for nearly 50 percent of the observed persistence in intergenerational income. Despite their higher opportunity costs of time, more skilled parents choose to invest more time in their young children. This force significantly amplifies the intergenerational correlation of human capital. However, at the same time, I find that the parental time investment channel actually reduces the cross-sectional dispersion of human capital. This result is driven by dynastic smoothing of the marginal value of human capital; individuals insure their descendants' lifetime utilities through the parental investment channel by investing more time in less able children. Finally, policy experiments suggest that interventions targeted at the college decision have little effect on intergenerational mobility. By contrast, I find that those targeted at parental time investment decisions, such as a proportional subsidy for such investments, may be an effective way to increase intergenerational mobility as well as social welfare, since they disproportionately raise investment in the children from disadvantaged families.