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Explaining Income Inequality and Intergenerational Mobility: The Role of Fertility and Family Transfers

Poor families have more children and transfer less resources to them. This suggests that family decisions about fertility and transfers increase income inequality and dampen intergenerational mobility. To evaluate the quantitative importance of this mechanism, we extend the standard heterogeneous-agent life-cycle model with earnings risk and credit constraints to allow for endogenous fertility, family transfers, and education. The model, estimated to the US in the 2000s, implies that a counterfactual at income-fertility profile would-through the equalization of initial conditions-reduce intergenerational persistence and income inequality by about 10%. The impact of a counterfactual constant transfer per child is twice as large.

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