Abstract

We analyze the determinants of occupational and educational decisions in a model of dynastic altruism where individuals invest in the education of their children. We show that the relevant wage gaps that drive these two decisions are associated with the expected skill premium and the expected premium that each skill class faces when choosing a more effort-demanding occupation. As the occupational and educational decisions determine the relative frequency of high wages, we analyze how these wage gaps affect the frequency of high wages within each skilled class. We show that the results from this analysis are consistent with empirical evidence based on cross-country data for several European economies.