Social status pursuit,distribution of bequests and inequality

The quest for social status modifies lifetime decisions and as a consequence, the trajectory of the overall economy. Focusing on the relative wealth dimension of social status, we build a two-period overlapping generations model with heterogeneous agents to investigate the effects of status quest on the evolution of bequest distribution and household inequality. We show that the bequest motive and the concern for social status not only increase the stationary level of capital but also enhance the household equality.     

Do Germans Save to Leave an Estate? An Examination of the Bequest Motive

I investigate whether a bequest motive for savings influences the post-retirement wealth trajectories of German households. Two measures of the bequest motive are studied: the existence of children as the main group of potential heirs and the respondents' declared intention to bequeath. While having children has no significant impact on households' wealth trajectories, stated bequest intentions are associated with considerable heterogeneity in wealth holdings. The main conclusion from this study is that both the pure life-cycle model and the life-cycle model with bequest motives provide a valid basis for a theory of household wealth accumulation once the heterogeneity of preferences is acknowledged.
JEL classification : D 91; J 14     

INCOME AND WEALTH OVER THE LIFE CYCLE EVIDENCE FROM PANEL DATA

In this paper we examine household wealth and income in the Netherlands using data from the Socio Economic Panel (SEP) in the period 1987–89. We provide an evaluation of the quality of the data and some simple statistics which describe the behavior of wealth, saving, and income over the life cycle. We find there is substantial heterogeneity in the behavior of households, and wealth holdings vary substantially even among the same age group. By exploiting the panel feature of the SEP, we derive saving from first differencing wealth. We find that a sizeable fraction of households do not dissave when old and we find some evidence in favor of the bequest motive.     

Bequest Values for Marine Resources: How Important for Indigenous Communities in Less-Developed Economies?

Communities owning and living on ancestral land tend to have a strong sense of stewardship over the land and its resources, which may translate into an economic value to present generations of being able to pass on ancestral lands to future generations (i.e. bequest value). This study estimates bequest values to local users of a traditional fishing ground on the Coral Coast of Fiji, using a contingent valuation approach. Using monetary as well as time-based contributions, bequest values are estimated at between FJ$1.25–1.41 (US$1.25–1.41 (US0.64–0.73) per individual per week, or FJ183.90 (US183.90 (US106.91) per household per year. This represents a significant proportion of stated average household expenditure, comparable to spending on durable household goods, and clothes and footwear. These results suggest that low-income groups may have significant bequest values, which should be accounted for in developing-economy valuation studies.     

Economic growth and the demand for education: is there a wealth effect?

Human capital investment in developing countries is thought to be significantly constrained by household resources. This paper studies the relationship between household resources and the demand for education using recent household survey data from Vietnam. The data cover a period, 1993–1998, of exceptional income growth in Vietnam, during which secondary school enrollment rose substantially. Using consumption expenditures to measure household wealth, we find a positive and significant relationship between changes in wealth and changes in the demand for education. This wealth effect persists even after controlling for locality-specific factors such as changes in education returns and the supply and quality of schools, and for the opportunity costs of schooling.     

Envy and Inequality*

We present an overlapping generations economy, populated by heterogeneous agents who care about both consumption relative to others and the bequest they leave to their offspring. We show that saving and bequest rates vary across the income distribution, and we obtain several interesting results. First, envy reduces the steady‐state capital stock and increases the degree of inequality in consumption, capital ownership, and bequests. Second, if the bequest motive is sufficiently strong the equalizing effect of bequests disappears. Third, income inequality for a given cohort increases with age. Fourth, the distribution of inherited wealth becomes more unequal than that of wealth in general. Fifth, economic position becomes more persistent across generations.     

THE RISK‐FREE RATE IN A FINITE HORIZON MODEL WITH BEQUESTS

This paper studies the risk‐free rate in an overlapping generations economy with bequests. It is shown that the risk‐free rate depends on risk aversion, the elasticity of intertemporal substitution, the share of wealth invested in human wealth, life expectancy, and the preference for bequests. In a standard life‐cycle context, mortality increases the subjective time rate of discount, and thus increases the compensation required to postpone consumption. This latter effect is offset in a bequest‐driven model of the type considered here, leading to much more powerful income effects. In this sense, the model provides a bequest‐motive explanation for the risk‐free rate puzzle put forward by Weil in 1989.     

EDUCATION AND THE NATIONAL WEALTH OF THE UNITED STATES*

Human capital theory has motivated a great many empirical investigations into the relationship between education and earnings potential. These studies test refinements of the theory, but do not attempt to value education for the economy as a whole. This study develops series which track human wealth and its educational components for the United States from 1946 to 1980. Three related educational time sequences emerge: (1) schooling wealth, the present value of the current and future contributions of the existing schooling stock to national income; (2) net change in schooling wealth, the amount added to present value in that year; and (3) schooling investment, the present value of the future contributions of the new schooling conducted in that year. One important lesson of this exercise is that the last two series can be quite different as a result of the pattern of appreciation and depreciation of human wealth over the lifetimes of individuals. Moreover, education increases the age of peak human wealth and thus should shorten the period during which individuals save for retirement. This phenomenon may induce a demographic cycle in the nation's savings rate, especially evidenced with the aging of the baby-boom cohort. The magnitudes of the human and schooling wealth estimates are large when compared to financial wealth. For a 4 percent rate, the period-wide average for human wealth is five times-and schooling wealth 2.6 times-the Federal Reserve Board's measure of household net worth. These estimates are naturally sensitive to the discount rate chosen, but show that the gap between human and financial wealth has been widening and that the value of schooling provided in any year greatly exceeds its cost. Schooling represents a form of saving whose value is several times the conventional measure of saving.     

Do family resources matter? Educational attainment during transition in Poland*

We analyse the relationship between family background and children's educational attainment in the 1990s in Poland. If parental poverty affects children's educational prospects, the increase in social inequalities observed in the Polish transition process will be transmitted between generations. We apply an ordered probit model of educational attainment on longitudinal data from the Polish Labour Force Survey. Surprisingly, parents’ income and their labour market status have only a weak impact on children's education. Parents’ schooling, however, is strongly related to children's, and so are household structure, city size, and region of residence. We conclude that, if transmission of inequality takes place between generations, this seems to be primarily caused by the inheritance of human capital rather than by pure wealth effects.     

THE SIZE DISTRIBUTION OF HOUSEHOLD DISPOSABLE WEALTH IN THE UNITED STATES

In this study, new estimates are presented of the size distribution of household wealth in the U.S. in 1969. Compared to previous studies, its major advance is the inclusion of all marketable or discretionary household assets and liabilities and their alignment with national balance sheet totals. Household disposable wealth (HDW) is defined as the sum of all marketable or fungible assets held by households less liabilities. The Gini coefficient for HDW is 0.72, the share held by the richest one percent of households is 31 percent, and the share held by the top five percent is 49 percent. There is, however, a large variation in the concentration of different household assets. The Gini coefficient is 0.30 for household durables and inventories, 0.69 for equity in owner-occupied housing, 0.94 for bonds and securities, and 0.98 for corporate stock. HDW is then divided into two mutually exclusive components. The first, called "life-cycle wealth," is defined as the sum of equity in owner-occupied housing, durables, household inventory, demand deposits and currency, and the cash value of life insurance and pensions less consumer debt. This form of wealth tends to be accumulated over the life-cycle for either consumption, liquidity, or retirement purposes. The second, called "capital wealth," is the sum of time and savings deposits, bonds and securities, corporate stock, business and investment real estate equity, and trust fund equity. Life-cycle wealth is substantially less concentrated than capital wealth. The Gini coefficient for it is 0.59, while that for capital wealth is 0.88. Moreover, among the lower wealth groups, over 80 percent of household wealth takes the form of life-cycle wealth, whereas among the top wealth groups the proportion is under 20 percent. The results suggest substantially different savings motivations between the two groups.     

ESTIMATES OF HOUSEHOLD WEALTH INEQUALITY IN THE U.S., 1962–1983

The study has two major objectives. The first is to determine time trends in household wealth inequality in the U.S. over the 1962–83 period. Four concepts of wealth are analyzed: (i) total household wealth, defined as total household assets less liabilities; (ii) fungible wealth, defined as total household wealth less consumer durables and household inventories; (iii) financial wealth, defined as fungible wealth less equity in owner-occupied housing; and (iv) capital wealth, defined as financial wealth less currency, checking accounts, and time deposits. Relying on a variety of data sources, I find that wealth inequality remained relatively constant from about 1962 to 1973, fell sharply from about 1973 to about 1979, and then rose sharply between 1979 and 1983. Concentration in 1983 was greater than that in 1962 for financial and capital wealth but of similar magnitude for total and fungible wealth. The second, methodological in nature, is to analyze the effect on measured inequality of the alignment of raw survey data to national balance sheet totals. I find that the alignment process can significantly affect point estimates of household wealth distribution but does not generally affect the direction of inequality trends.     

THE VANISHING BEQUEST TAX: THE COMPARATIVE EVOLUTION OF BEQUEST TAXATION IN HISTORICAL PERSPECTIVE

Bequest tax revenues have been declining in OECD countries for at least 70 years. We propose an explanation that is based on a dynamic politico‐economic model where the evolution of bequest taxation is determined by wealth inequality. Since economic development induces a growing role of labor income and thus a reduction of wealth inequality, bequest taxation is reduced over time. The model also embeds a process of structural reallocation from agriculture to manufacturing and a consequent shift of the tax base from easy‐to‐tax land to hard‐to‐tax capital. This process implies a lower tax level and slower equalization‐induced tax reduction, the higher is the tax avoidance rate and the less developed is the economy. The introduction of franchise restrictions which are gradually lifted over time allows the hump‐shaped long‐term evolution of bequest taxation to be reproduced starting from the nineteenth century for those countries that are now modern industrial democracies. The evolution of political institutions also helps to explain the discrepancies currently observed between tax systems in developed and underdeveloped countries.     

Nursing home choice,family bargaining,and optimal policy in a Hotelling economy

We develop a model of family bargaining to study the impact of the distribution of bargaining power within the family on the choice of nursing homes by families, and on the locations and prices chosen by nursing homes in a Hotelling economy. In the baseline (static) model, where the dependent parent cares only about the location of the nursing home, the markup of nursing homes is increasing in the bargaining power of the dependent parent, and nursing homes are located at the extreme periphery. We compare the laissez‐faire with the social optimum (which involves more central locations of nursing homes), and examine its decentralization in first‐best and second‐best settings. We explore the robustness of our results to introducing a bequest motive in a dynamic overlapping generations model, which allows us to study the joint dynamics of wealth accumulation and nursing home prices. If the bequest motive is strong, the markup is decreasing in the bargaining power of the dependent. However, wealth accumulation, by reducing interest rates, raises markup rates and nursing homes prices.     

MEASUREMENT OF THE DISTRIBUTION OF WEALTH IN CANADA

The only periodic data available in Canada on the asset holdings and net worth of the household sector are data collected through a series of household surveys originally initiated in 1954. Some limited data on the holdings of financial claims by the personal and unincorporated business sector are available from flow of funds work. Data are unavailable for estimation from estate tax returns.
The scope of the surveys has been expanded substantially so that the most recent survey obtained a very comprehensive list of asset holdings. The experience with Canadian surveys has been similar to that of other countries; surveys appear to underestimate asset holdings although the estimates are more reliable for widely held assets than for assets with a very skewed distribution. Nevertheless, the surveys appear to trace the accumulated distribution of personal savings over time to a considerable degree and provide useful cross-sectional trend data.
Canadian data show that wealth is more unequally distributed among family units than is income although wealth appears to be more equally distributed between income groups than is income. Wealth is also very unequally distributed within the same income group. Over time, there appears to have been some movement towards a more equal distribution of asset holdings between income groups.     

HOUSEHOLD SAVING AND PORTFOLIO CHANGE: EVIDENCE FROM THE 1983–89 SCF PANEL

There are few sources of high-quality data on the dynamics of wealth accumulation. This paper uses newly available data from the 1983 89 panel of the Survey of Consumer Finances to examine household saving and portfolio change over the 1980s. Our main findings are as follows. First, median household wealth rose modestly over the period. Second, while overall wealth inequality increased, households in the top 1 percent of the wealth distribution in 1983 saw their share of total wealth decline, probably reflecting turnover among the very wealthy. Third, although age, income, and initial wealth had significant effects in regressions on household saving, a large part of the variation in saving was unexplained. Finally, there were clear life-cycle patterns in the portfolios of assets and liabilities held by households, with younger households acquiring homes, businesses and all types of debts, and older households divesting themselves of these assets and debts.     

THE ACCUMULATION OF HOUSEHOLD WEALTH OVER THE LIFE-CYCLE: A MICRODATA ANALYSIS*

In this paper, I investigate the validity of the Modigliani-Brumberg (M-B) model as an explanation of the variation of wealth holdings among households. The model as such, even with the inclusion of estimates of household lifetime earnings, explains only a minute portion of the variation in household wealth. Indeed, for certain groups such as non-white, rural residents, and the low educated, the coefficients of the regression model are insignificant. Moreover, when the top wealth holders are removed from the sample and when non-cash financial and business assets are eliminated from the household portfolios, the explanatory power of the M-B model increases markedly. Essentially, the validity of life-cycle wealth accumulation models must be restricted to the white, urban, educated middle classes and their accumulation of housing, durables, and cash. The rich have very different motives for saving and very different sources of saving, while the poor do not earn sufficient income over their lifetime to accumulate any non-negligible wealth.     

Explaining the wealth holdings of different cohorts: Productivity growth and Social Security

In this paper, we explore the reasons why different generations accumulate different amounts of wealth. We use basic economic theory to propose two indicators of the economic conditions under which households accumulate wealth. The first one represents productivity differences across cohorts: The aggregate level of gross national product per capita around the time the head of the household entered the labor market. The second measure summarizes the changes in Social Security during the head of household's working life. Using panel data from the Dutch Socio-Economic Panel, we show that productivity growth can explain all the cohort effects present in income data, while productivity growth and the generosity of Social Security can explain all the cohort effects present in household net worth. We also find a limited offset of Social Security on wealth holdings.     

Do the Retired Elderly in Europe Decumulate Their Wealth? The Importance of Bequest Motives,Precautionary Saving,Public Pensions,and Homeownership

We use microdata on a large number of European countries from the Survey of Health, Ageing and Retirement in Europe (SHARE) to examine the wealth accumulation (saving) behavior of the retired elderly in Europe. We find that less than half of the retired elderly in Europe are decumulating their wealth and that the average wealth accumulation rate of the retired elderly in Europe is positive though relatively moderate (6.6 percent over a 3-year period). These findings suggest that the Wealth Decumulation Puzzle (the tendency of the retired elderly to not decumulate their wealth or to decumulate their wealth more slowly than expected) applies in the case of Europe. Moreover, our regression results suggest that bequest motives, generous public pension systems, and the reluctance of retired elderly homeowners to sell or borrow against their owner-occupied housing are the primary explanations for the existence of the Wealth Decumulation Puzzle in Europe.     

WEALTH ACCUMULATION OF CANADIAN AND FOREIGN-BORN HOUSEHOLDS IN CANADA

This study focuses on the role of foreign-born households in Canada's asset market. An empirical analysis of wealth accumulation is conducted for a large sample of Canadian households circa 1977–84. This study period reflects a change in Canada's immigration policy which resulted in immigration Rows switching from Europe to Asia. A life-cycle framework is used to examine wealth accumulation behaviour of the foreign-born vis-à-vis Canadian-born households. The empirical results confirm the existence of an inverted 'U'-shaped wealth-age profile for both Canadian and immigrant households. However, the 1977 results show that the rate of wealth accumulation is higher for the immigrant household than the Canadian-born household in pre-retirement years, while the 1984 results reveal the opposite. After retirement, the rate of wealth dissipation is slower for Canadians than for foreign-born households. Only the 1984 results indicate that public social security wealth displaces household savings for both the Canadian-born and the foreign-born by a small amount. Finally, an immigrant household exhibits a stronger transfer motive within a family than a Canadian-born household regardless of year tested.     

Capitalists,workers, and the burden of debt

Abstract

This paper analyzes the burden of debt in a growth model that combines overlapping generations of workers who save for life-cycle reasons and dynastic agents who save for bequest reasons (‘capitalists’). Ricardian Equivalence prevails, but capitalists regard the debt serviced out of taxes on workers as net wealth. In the long run, the Cambridge Theorem holds: the relationship between the rate of profit and rate of growth is determined by the capitalist saving function, independently of worker or government saving. Two alternative closures are considered. Under exogenous growth constrained by a fully employed labor force, debt and deficits result in temporary effects on the distribution of income but permanent effects on the distribution of wealth. Under endogenous growth constrained by a fully utilized capital stock, debt and deficits result in temporary effects on the growth rates of the components of wealth and permanent effects on the level and distribution of capital.