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Intergenerational Mobility, Education, and The Skill Premium: Investigating Optimal Government Cash Transfers in China

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  • Wei Jiang
  • Jingwei Wu

Abstract

We examine optimal government education expenditure policies in the form of cash transfers to school-aged children, with the objectives of enhancing intergenerational income mobility and reducing the skill premium. Using a calibrated overlapping generations (OLG) model tailored to recent empirical data from the Chinese economy, we analyse the welfare-maximizing policy design of this policy. Our findings indicate that optimal policy involves directing greater cash transfers toward children with lower initial ability, as their educational attainment requires higher relative effort. This aligns with China’s nationwide higher education expansion initiative launched in 1999. Quantitatively, the optimal policy enhances upward income mobility by 56%, reduces the skill premium by 58%, and increases aggregate welfare by approximately 13%.

Suggested Citation

  • Wei Jiang & Jingwei Wu, 2026. "Intergenerational Mobility, Education, and The Skill Premium: Investigating Optimal Government Cash Transfers in China," Studies in Economics 2602, School of Economics, University of Kent.
    • Handle: RePEc:ukc:ukcedp:2602
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    References listed on IDEAS

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    1. Patel-Campillo, Anouk & García, V.B. Salas, 2022. "Breaking the poverty cycle? Conditional cash transfers and higher education attainment," International Journal of Educational Development, Elsevier, vol. 92(C).
    2. Huang, Xiao & Huang, Shoujun & Shui, Ailun, 2021. "Government spending and intergenerational income mobility: Evidence from China," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 387-414.
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    Keywords

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • I25 - Health, Education, and Welfare - - Education - - - Education and Economic Development
    • I28 - Health, Education, and Welfare - - Education - - - Government Policy

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