Loss aversion, education, and intergenerational mobility

What is it about?

This paper suggests that when people are deciding how much education to invest in, they consider the standard of living they had as a child. Because they want to avoid being poorer than they were as children, people will invest in enough education to replace that standard of living, but often not any more. This model does a good job of replicating the experience of income mobility across generations for white American families, but not for black American families.

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Why is it important?

This provides a behavioral explanation for why people might invest in less education than would otherwise appear to be optimal. Policies that reduce the cost of education, and even provide a living stipend while students are still in school, may increase the economy's overall level of education and, potentially, its growth.