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The Causal Effect of Parents' Education on Children's Earnings

We present a model of endogenous schooling and earnings to isolate the causal effect of parents’ education on children’s education and earnings outcomes. The model suggests that parents’ education is positively related to children’s earnings, but its relationship with children’s education is ambiguous. Identification is achieved by comparing the earnings of children with the same education, whose parents have different levels of education. An extended version of the model with heterogeneous tastes for schooling is estimated using the HRS data. The empirically observed positive OLS coefficient obtained by regressing children’s schooling on parents’ schooling is mainly accounted for by the correlation between parents’ schooling and children’s unobserved tastes for schooling. This is countered by a negative, structural relationship between parents’ and children’s schooling choices, resulting in an IV coefficient close to zero when exogenously increasing parents’ schooling. Nonetheless, an exogenous one-year increase in parents’ schooling increases children’s lifetime earnings by 1.2 percent on average.