Parental Priorities and Economic Inequality.

• Author: Margo, Robert A.

Review by Casey B. Mulligan. Chicago: University of Chicago Press, 1998. Pp. xvi, 377 $24.95.

Outside of economic history, it is rare for a recent Ph.D. in economics to publish a dissertation as a book and rarer still for the publisher to be one of the premier academic presses in economics. That said, Casey Mulligan's Parental Priorities and Economic Inequality compels attention because of the importance of the subject matter - the intergenerational transmission of inequality - and thoroughness of the analysis.

Parental Priorities is divided into an Introduction, Conclusion, and 12 substantive chapters arranged in 4 parts. The Introduction (Chapter 1) reviews the subject matter of the following chapters.

Chapter 2 begins the exposition with a simple two-period consumption-savings model borrowed from consumer theory. Households consist of a single parent and child. Utility is defined over the parent's current consumption and the child's future consumption. Thus, preferences are U([C.sub.p], [C.sub.c]), where p = parent and c = child and [p.sub.c] is 1/(1 +r). Because a period here is really a lifetime, r is defined across generations; hence, small, permanent changes in r can have a huge effect on p. Three characteristics of parental preferences are examined: the degree of altruism, moderation, and homotheticity. The indifference curves of a more altruistic parent are shifted toward the axis measuring the consumption of the child relative to those of a less altruistic parent. By moderation, Mulligan means the extent of substitutability between parental and child consumption. Leontief preferences, used extensively later in the book, imply maximum moderation (zero substitutability). Homotheticity means that, for any given value of r, [C.sub.c]/[C.sub.p] is independent of wealth, so that there is no regression to the mean in consumption across generations.

Chapter 3 reviews two previous models of intergenerational transmission, the permanent income (PI) model made famous by Robert Barro and the imperfect capital markets model. The key idea of the PI model is that income is fungible across generations, so that attempts to redistribute income by the government (such as social security) can be undone by families. In the first version of the model, earnings are taken as given, but Mulligan shows that basic predictions survive endogenous earnings. Since the permanent income model is focused on opportunities, there is no reason to make assumptions about preferences. If preferences are homothetic, consumption will not regress to the mean across generations, even if earnings does.

Unlike the PI model, the imperfect capital markets (ICC) model assumes that parents cannot incur debt that will be passed onto their offspring. At low levels of parental income, it may not be possible for parents to optimally invest in their children's human capital (optimal levels are defined by the PI model). Thus, even if preferences are homothetic, below the critical income level, the expansion path follows the earnings function; above the critical level, the expansion path is a straight line. Mulligan argues, however, that...