Networks of Intergenerational Mobility

Abstract

The work of Piketty has documented the long-run evolution of capital accumulation and the increasing wealth inequalities in western countries. This work re-opened the policy debate around the taxation of capital and inheritance. Standard models of capital taxation prescribe a null optimal tax rate for capital holdings on the basis that the supply of capital is infinitely elastic and that economic agents fully optimize over their life-cycle. These assumptions rarely hold. In turn, meritocracy and equality of opportunity are also presented as rationales for the capital taxation of inheritance. To which extent does inequality in inherited wealth magnify wealth inequality and by how much? What is the tax rate on capital flows and inheritance stocks that stabilizes wealth inequality, for a given growth rate of population and growth rate of income? To investigate these questions, we construct an agent-based Sugarscape model of wealth accumulation with overlapping generations, heterogeneous skill endowments, skill inheritability, assortative mating based on skills and wealth position. Simulations end up with networks of relatives, usually comprising four overlapping generations. Network structures show that assortative mating based on skills tend to have a more pronounced role in promoting equality in inherited wealth. Intergenerational mobility is strongly related with inherited skills being reinforced by marital sorting based either on skills or wealth levels.