The Inheritance of Advantage

Some agents are better treated by the market than others. In our model this discrimination arises from statistical discrimination based on the observables on the background of the individual (her parents). Advantages thus created increase the intergenerational correlation of income. This has some strong implications. First, it implies that intergenerational mobility and income inequality should correlate negatively. Second, the amplification mechanism generated by advantages may produce a multiplicity of steady states. Third, the introduction of "meritocracy" (informative signals on talent) may actually decrease mobility due to general equilibrium effects: by increasing income dispersion, they also increase the value of background.