A Simple Model of Intergenerational Mobility Under the Heterogeneous Effects of Public Expenditure

This paper analyzes the relationships among intergenerational mobility, human capital and public expenditure. We propose to incorporate the heterogeneous effects of public expenditure into a standard overlapping generations model of human capital accumulation. We show that these heterogeneous effects alter the shape of the relationships among intergenerational mobility, human capital and public expenditure in a way that has new policy implications. First, intergenerational mobility depends on the heterogeneous effects of public expenditure. Second, the relationship between public expenditure and intergenerational mobility can be either positive or negative. Third, public expenditure produces a non-monotonic effect on human capital. We find that when fiscal policy increases intergenerational mobility, the level of human capital may decrease. The government may therefore face a trade-off between fostering intergenerational mobility and increasing the level of human capital through public expenditure.