Some factors determined early in life are key determinants of the lifetime value of earnings, consumption and wealth. Furthermore, some of these variables are determined by parental background (ability) or passed on directly from parents (initial wealth). In this paper, I study an overlapping generations economy with a life cycle structure, with borrowing constraints and costly human capital acquisition, in which initial conditions are determined by parental background. The cost of human capital may prevent constrained agents to optimally acquire human capital and intergenerational transmission of wealth may alleviate this effect for wealthy household. With a preliminary calibration, I find the initial wealth is as important as human capital, and ability has a secondary role. This result is in stark contrast with the results previously found in the literature. This result suggests that accounting for borrowing constraints and intergenerational links is key to assess the quantitative impact of initial conditions.
Several pieces of evidence are interpreted as if workers search on-the-job to prevent a layoff, so that it is not unusual they accept wage cuts when moving to new jobs. We conceptualize this behavior as a self-insurance mechanism obtained by exerting effort. Since on-the-job search insures against idiosyncratic risk unlike assets, it helps understand limited participation in asset markets. We formalize these intuitions by constructing an economy with idiosyncratic dismissal shocks and costly on-the-job search. Workers may use on-the-job search not only as a mechanism to climb the wage ladder, but also to avoid future bad shocks and hence, on-the-job search acts as an insurance mechanism. We show that consumption evolves according to a standard Euler equation in which current effort impacts the income distribution tomorrow. We solve and calibrate the model to assess its quantitative empirical performance.
I develop a quantitative model to study the impact of taxation in wealth inequality and wealth mobility across generations. I consider progressive income taxes, corporate taxes and estate taxes. The model is used to estimate the fraction of inherited wealth in the economy and the impact of taxes in wealth inequality, wealth mobility and self-made wealth.