The objective of the paper is to account for this observation. We construct a dynastic overlapping generations model in which individuals live for two periods.
Agents face two types of idiosyncratic i.i.d.
We characterize a stationary equilibrium for this economy and choose parameter values to match relevant features of the U.S. economy, in particular the distributions of education, earnings, and income. We find that the model is able to account for around one third of the observed persistence in earnings and half of the persistence in income.