We study the long-run macroeconomic, distributional, and intergenerational effects of school tracking —the allocation of students to different types of schools— by incorporating school track decisions into a general-equilibrium heterogeneous-agent overlapping-generations model. The key ingredient in the model is the child skill production technology, where a child’s skill development depends on her peers and the instruction pace in her school track. We show analytically that this technology can rationalize reduced-form evidence on the effects of school tracking on the distribution of child skills. We then calibrate the model using representative data from Germany, a country with a very early school tracking policy. Our calibrated model predicts that an education reform that postpones the tracking age from ten to fourteen generates sizable improvements in intergenerational mobility but comes at the cost of modest losses in aggregate human capital and economic output, reducing aggregate welfare. This efficiency-mobility trade-off is rooted in the effects of longer comprehensive schooling on child learning and depends crucially on the presence of general equilibrium effects in the labor market. Finally, our calibrated model predicts that policies reducing the parental influence in the school track choice increase both social mobility and aggregate economic output, improving aggregate welfare.

We document significant gaps in wealth across health status over the life cycle in Germany—a country with a universal healthcare system and negligible out-of-pocket medical expenses. To investigate the underlying sources of these wealth-health gaps, we build a heterogeneous-agent life-cycle model in which health and wealth evolve endogenously. In the model, agents exert efforts to lead a healthy lifestyle, which helps maintain good health status in the future. Effort choices, or lifestyle behaviors, are subject to adjustment costs to capture their habitual nature in the data. We find that our estimated model generates the great majority of the empirical wealth gaps by health and quantify the role of earnings and savings channels through which health affects these gaps. We show that variations in individual health efforts account for around a quarter of the model-generated wealth gaps by health, illustrating their role as an amplification mechanism behind the gaps.

We use a human capital formation model to compare extending school time to private education subsidies in mitigating the adverse effects of school closures. The impact on inequality and mobility depends crucially on the substitutability between private and public inputs.