Abstract
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.
