Intergenerational mobility and reference groups

Abstract

We model the role of reference groups as a mechanism for inequality persistence across generations. Reference group theory suggests that culturally shaped processes alter individuals' ambition. As a result, relative deprivation e ects may discourage (encourage) low-background individuals from making adequate mobility-enhancing investments. The model con rms that reference groups could be an inequality transmission mechanism across generations, and shows that both the size and direction of this e ect depends on, (a) the composition of the reference group, (b) the intensity and functional form of income comparisons, (c) the ex-ante inequality between agents from di erent social origins and the reward of e ort, and (d) the information about their peers and past income mobility. Our model is more general than previous models and its ndings are in stark contrast to models based upon self-ful lling beliefs and fatalistic predictions. Finally, our model explicitly links two strands of the literature: Reference group theory and aspiration failure models.