Parental investments in children can take one of three broad forms: (1) Time investments during childhood and adolescence that aid child development, and in particular cognitive ability (2) Educational investments that improve school quality and hence educational outcomes (3) Cash investments in the form of inter-vivos transfers and bequests. We develop a dynastic model of household decision making with intergenerational altruism that nests a child production function, incorporates all three of these types of investments, and allows us to quantify their relative importance and estimate the strength of intergenerational altruism. Using British cohort data that follows individuals from birth to retirement, we find that around 40% of differences in average lifetime income by paternal education are explained by ability at age 7, around 40% by subsequent divergence in ability and different educational outcomes, and around 20% by inter-vivos transfers and bequests received so far.

ACCESS PAPER