The great Gatsby curve and the Carnegie effect

Abstract

We show that US commuting zones with higher income inequality exhibit less upward social mobility at the bottom of the income distribution, more downward social mobility at the top, and lower average income. We explain this empirical evidence through a life-cycle model in which investment in education and effort increase labor income, and individuals are altruistic, suffer disutility from exerting effort, and face a credit constraint. We propose two mechanisms driving those findings. First, due to the credit constraint, investment in education and income of individuals born into low-income families is constrained by parental wealth, which explains that upward social mobility at the bottom is lower in commuting zones with higher inequality where low-income families have less wealth. Second, individuals born into a ffluent families exert less effort and earn lower labor income when they inherit a larger wealth, which explains that downward social mobility at the top is larger in the most unequal commuting zones where affuent families are wealthier.