Intergenerational Mobility, Education, and The Skill Premium: Investigating Optimal Government Cash Transfers in China

Wei Jiang and Jingwei Wu ()

Studies in Economics from School of Economics, University of Kent

Abstract: We examine optimal government education expenditure policies in the form of cash transfers to school-aged children, with the objectives of enhancing intergenerational income mobility and reducing the skill premium. Using a calibrated overlapping generations (OLG) model tailored to recent empirical data from the Chinese economy, we analyse the welfare-maximizing policy design of this policy. Our findings indicate that optimal policy involves directing greater cash transfers toward children with lower initial ability, as their educational attainment requires higher relative effort. This aligns with China’s nationwide higher education expansion initiative launched in 1999. Quantitatively, the optimal policy enhances upward income mobility by 56%, reduces the skill premium by 58%, and increases aggregate welfare by approximately 13%.

Keywords: Chinese economy; intergenerational income mobility; skill premium; government cash transfers (search for similar items in EconPapers)
JEL-codes: E24 E62 I25 I28 (search for similar items in EconPapers)
Date: 2026-04
New Economics Papers: this item is included in nep-cna and nep-dge
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