Inheritances play a more important role than education and income in the transmission of wealth between parents and children: it accounts for half of ‘intergenerational wealth persistence’ across generations. What’s more, most of the transmission of wealth comes from parents rather than from grandparents.
These are among the findings of research by Adrian Adermon, Mikael Lindahl and Daniel Waldenström, published in the July 2018 Economic Journal. Their study analyses data on people born in Swedish city of Malmö in 1928, as well as their parents, children and grandchildren.
The authors note that an extensive body of research on social mobility has shown that family background matters a lot for educational attainment and earnings. But the generational links in wealth have been much less studied, mainly because wealth data are more difficult to access.
The new study uses a unique Swedish dataset to explore how wealth is transmitted over generations, looking at the role of parents and grandparents. The authors are able to measure directly how important inheritances and gifts are for the wealth transmission, something that has not been done before.
The data set includes individuals born in Sweden’s third largest city, Malmö, in 1928, and their parents, children and grandchildren. Using data from tax registers, the researchers observe wealth at mid-life (around ages 40-60). Inheritances received by the second generation are obtained from estate records. Observing wealth at mid-life and inheritances makes this a unique dataset.
The main finding is that wealth mobility is lower than income mobility, that most of the transmission comes from parents (and not grandparents), and that bequests and gifts play a distinctive role in this transmission. Specifically, the researchers find that inherited wealth appears to account for at least half of the observed transmission. Links in education and income between parents and children play a much smaller role for the wealth mobility.
Parents have the most important role, grandparents matter less
The findings show that parents’ wealth matters more than grandparents’ wealth for a person’s wealth status. A 1% increase in the parental wealth ranking is associated with between 0.3% and 0.4% increase in the child's wealth ranking. Persistence is stronger in the top of the parental wealth distribution throughout, indicating a non-linear relationship in wealth mobility. Grandparents’ wealth is associated with grandchildren’s wealth, but this mostly vanishes when controlling for the role of parental wealth.
Inheritances accounts for half of the generational wealth persistence
Many potential factors could explain intergenerational wealth persistence: intelligence, patience, social skills, norms or bequests. Unfortunately, most of these are almost impossible to measure with respect to their influence on mobility. But one potential key factor can be observed – bequests and gifts – and this is the factor examined here.
Estimating the precise role of inheritances for wealth mobility is a novel contribution to research in this area. The authors use two different methods to do this: one that adds inheritances to the standard wealth mobility regressions; and another that subtracts past inheritances from children’s wealth before doing the mobility analysis.
Both methods show the same result: when controlling for inheritances, the wealth association between parents and children shrinks by more than half. Other factors, specifically education and income, account for only a small share of the persistence.
Figure 1 shows the parent-child wealth association with and without inheritances included in children’s’ wealth. The slope of each line shows the strength in the association between the rank of the child’s wealth and the rank of parent’s wealth.
The slopes are similar for those with lower wealth, but then diverge, resulting in a much flatter slope for the association when child’s wealth is purged from the inheritance channel. On average, inherited wealth accounts for at least half of the observed transmission.
The association of wealth between parents and children, with and without inheritances
Note: Horizontal axis shows relative wealth (percentile ranked) for the parental (first) generation, and vertical axis shows relative wealth for the child (second) generation. Solid line show nonparametric regression fits, and dashed black line show the corresponding fit when child wealth has been purged of inheritance.
‘Intergenerational Wealth Mobility and the Role of Inheritance: Evidence from Multiple Generations’ by Adrian Adermon, Mikael Lindahl and Daniel Waldenström is published in the July 2018 Economic Journal.