PUB - Publikationen an der Universität Bielefeld

We develop a theoretical labour market model with two generations of workers, endogenous social networks of parents and binary schooling choices of children. Since the market skill premium is unobservable, families rely on noisy wage information obtained from their social contacts giving rise to heterogeneous expectations across families. If social networks are subject to skill homophily and high skill parents are a minority, then children in low skill families are stronger affected by the lack of objective information, their expectations are more dispersed and they are less likely to study giving rise to a positive intergenerational schooling correlation. Next, we calibrate the model to the German labour market data (SOEP) and show that the described mechanism can potentially account for up to 15% of the intergenerational schooling correlation. Moreover, the data strongly supports the idea of skill homophily in the social networks. Finally, we extend the model to analyze the interaction between the network effect and the classical ability transmission for intergenerational mobility. We find that the interaction term is always negative, crowding out the network effect, which may help to explain small network and neighborhood effects reported in recent empirical work. Nevertheless, accounting for the network effect improves the fit of the model and helps to explain an inverse U-shape relationship between the intergeneratioanl schooling correlation and the share of high skill parents observed in the data.