Intergenerational transfers, insurance, and the transmission of inequality

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ContextChildren of economically successful parents tend to be economically successful themselves, having relatively high levels of income, education and wealth. By some estimates, the intergenerational association of economic status in the UK is the strongest in the developed world. These gaps are not only large by international standards, but have also grown in recent decades. Given that equality of opportunity is a common policy goal, disparities in economic outcomes determined by parental background are in urgent need of attention. Tackling such disparities requires an understanding of how they arise and which policies can have an impact.Aims and objectivesWe propose an ambitious programme of research that will further our understanding of the mechanisms whereby parents transmit their economic status to their children, and how this process is influenced by various government policies. We aim to make several advances over the existing literature by employing novel methods, exploiting large linked administrative datasets, and building cutting-edge models of economic decisions.Our first strand of research will provide the first causal estimates of the impact of increases in parents' housing wealth on child outcomes. Parental assistance has become increasingly important for young home-buyers. We will exploit newly-available data on parent-child links in the UK, and a novel empirical approach, to quantify the transmission of wealth shocks from parents to children. This will help us to understand the impact of the increases in UK house prices in recent decades on inequalities in wealth and homeownership amongst younger generations. Our second strand of research will draw on newly available transfer data, and a novel model of intergenerational transfers and home purchases, to estimate the impact of both parental financial assistance in home purchasing and policies to encourage home ownership on inequality.Our third strand of research considers inter-vivos transfers from parents to their adult children and role such transfers might play in insuring children against adverse shocks. Understanding the reasons when and why parents make such transfers to their children is an important consideration for the design of the taxation of transfers and provision of social insurance. We will use an unrivalled source of intergenerationally-linked administrative data covering inter-vivos transfers to explore how parents respond to unemployment and other shocks that their children experience.In the fourth and final strand of research, we will use a model of parental investments of time and money in their children to estimate important interactions between different transfers and the ways in which parents choose between different investments. This will allow us to explicitly separate the contribution of different factors (parental time investments, educational investments, and cash-transfers) in shaping child outcomes. We can then simulate the responses of parents and children to policy reforms, such as changes in access to higher education, to determine their effect on investments in children and, ultimately, the intergenerational transmission of inequality. Applications and benefitsThis research will yield a number of insights relevant to policy-makers, researchers and those in the private and third sector interested in property and inheritance taxation, saving and housing policy, education policy, and social mobility. We will maximise potential benefits by producing a range of outputs including a series of academic articles that will be submitted to top economic journals and non-technical summaries that communicate our key findings to non-academic audiences.