ABSTRACT

Because the permanent incomes of parents and children are typically unobservable, the permanent income of the parent family is taken to be a latent variable, but it is assumed that a model for its determinants is known to the researcher. I propose two related estimators for the intergenerational correlation: a 2SLS procedure and a more efficient MIMIC estimator. MIMIC also provides estimates of the variance parameters required to evaluate the bias of the OLS estimator. Using US data, I provide estimates for the intergenerational correlation ranging between 0.30 and 0.78. The bias of the OLS estimator is calculated to be in the order of 40%.