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The Intergenerational Transmission of Income Volatility: Is Riskiness Inherited?

By Stephen H. Shore Yz

Abstract

This paper examines the intergenerational transmission of income risk. Do risky parents have risky kids? Income volatility, a proxy for risk, is not observed directly; instead, it must be estimated –with substantial error –from the time-series variability of income. I characterize a process for income and use it to obtain individual-speci…c estimates of permanent and transitory income volatility for parents and their adult children in the Panel Study of Income Dynamics (PSID). I …nd that parents with higher income volatility have children with higher permanent income volatility. Not only is one’s place on the economic ladder inherited, this paper shows that economic mobility – the rate at which individuals move up or down the economic ladder – is also inherited. This e¤ect is similar in magnitude to the intergenerational transmission of education, and is apparent only after correcting explicitly for the attenuation bias induced by estimation error in parents’volatility parameters

Year: 2006
OAI identifier: oai:CiteSeerX.psu:10.1.1.187.2611
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