This paper analyzes the roles of innate talent versus family background in shaping intergenerational mobility and social welfare under different education systems. We establish an overlapping-generations model in which the allocation of workers between a high-paying skilled labor sector and a low-paying unskilled labor sector depends on talent, parental human capital, and educational resources, and the wage rate of skilled workers is determined by their average talent. Our model suggests that under the private education system, there is a negative relationship between income inequality and social mobility, and the steady-state average talent of skilled workers decreases with educational investments. Under the public education system that provides all children with equal educational resources, the allocation of workforce depends more on talent and less on family background. Consequently, both mobility and inequality increase, and social welfare may improve under reasonable conditions. When private educational investments are allowed on top of public education, the steady-state social welfare increases further. Moreover, if some parents are myopic, public education yields the highest welfare.
|Number of pages||36|
|Publication status||Published - 2020|
|Name||COROE Discussion Papers|
- Innate ability
- Private education
- Public education
- Intergenerational Mobility