A theory of Family Education Incentives and Inequality

A theory of Family Education Incentives and Inequality

In this paper, we examine the consequences of imperfect information on the pattern of transfers from parents to children. Drawing on the theory of mechanism design, we consider a model of family contract with two levels of effort. We prove that equal transfers among children are expected under perfect information, while the second-best contract implies risk-sharing between the two generations, so that poor families experience higher agency costs, therefore inequality persists.