The Twilight of the American Dream? How Inequality and Segregation Are Shaping Social Mobility in the U.S

In this paper we develop a theory for the twilight of the American dream and explore its economic and social consequences. We model the American dream and its evolution over time as the outcome of a learning model in which individuals form beliefs about the return to human capital investment from the experience of their neighbors. Increasing inequality drives up segregation across communities in the U.S. and reduces interactions among different socioeconomic groups. In turn, less interaction translates into fewer shared success stories. As lower income Americans are increasingly surrounded by poverty and failure, they shy away from the American dream and invest less in their children than higher income parents. This gap widens over time reducing inter-generational mobility and feeding higher levels of inequality in the following generations. To investigate the empirical relevance of our theory, we use a new county-level data set to compare our calibrated model to the time-series and geographic patterns of education.