Is intergenerational elasticity (IGE) a misleading measure of wealth mobility?

Abstract

Intergenerational elasticity (IGE) is a widely used measure of wealth mobility, represented as the slope in an AR(1) model. While intended to capture the extent of wealth mobility between generations, this paper identifies two key issues with its use. First, the IGE provides meaningful insights only when paired with the model’s convergence value, which is embedded in the intercept. A low IGE, often interpreted as high wealth mobility, does not necessarily imply that every subgroup of the population regresses to the same wealth level. Instead, it reflects the average rate at which the population converges toward the overall mean. Second, a comprehensive understanding of society’s wealth mobility requires a low variance of each parameter across subgroups. A high variance suggests that different subgroups converge to different wealth levels or at different rates. In order to use the IGE as a comparative measure across countries and time periods, we suggest examining both parameters and their variance. This way, a more nuanced and thorough assessment of intergenerational wealth mobility can be achieved.