Wealth Distribution and Optimal Inheritance Taxation in Life-cycle Economies with Intergenerational Transfers

Intergenerational transfers are introduced into a general equilibrium life-cycle model in order to explain observed levels of wealth heterogeneity. In our overlapping generations model, heterogenous agents face uncertain lifetime and leave both accidental and voluntary bequests to their children. Furthermore, agents face stochastic employment opportunities. The model is calibrated with regard to the characteristics of the US economy. Our results indicate that bequests only account for a small proportion of observed wealth heterogeneity. The introduction of an inheritance tax increases both welfare, as measured by the average lifetime utility of a newborn, and equality of the wealth distribution.
JEL classification : D 31; D 91; H 21; C 68; E 21     

Is Altruism Important for Understanding the Long-Run Effects of Social Security?

This paper quantifies the effects of social security on capital accumulation and wealth distribution in a life-cycle framework with altruistic individuals. The main findings of this paper are that the current U.S. social security system has a significant impact on capital accumulation and wealth distribution. I find that social security crowds out 8% of the capital stock of an economy without social security. This effect is driven by the distortions of labor supply due to the taxation of labor income rather than by the intergenerational redistribution of income imposed by the social security system. In contrast to previous analysis, I found that social security does not affect the savings rate of the economy. Another interesting finding is that even though the current U.S. social security system is progressive in its benefits, it may lead to a more dispersed distribution of wealth. Journal of Economic Literature Classification Numbers: D31, D58, E2, E6, H55, J22, J26.     

Intergenerational transfers and the social discount rate

This paper investigates the relationship between intergenerational asset transfers and the choice of the discount rate for use in cost-benefit analysis in a model of a competitive overlapping generations economy constrained by a socially managed exhaustible resource. Provided that there are no distortions in capital markets and that all agents hold perfect foresight, cost-benefit techniques will result in a Pareto efficient resource allocation if the discount rate is set equal to the market rate of interest. But since the path of the interest rate depends on the level of intergenerational transfers, cost-benefit techniques do not ensure a socially desirable distribution of welfare between generations; a social optimum will result only if intergenerational transfers are properly chosen and enforced. Decentralized private altruism may result in intergenerational transfers that both present and future individuals would agree are too small if members of the present generation attach positive weight to the general welfare of future generations, not simply their personal descendants. In a world where intergenerational transfers are non-optimal, second-best policy-making may imply a constrained optimum that is inefficient. Together, these findings suggest that cost-benefit analysis is at best a partial criterion to policy formulation that should be used only in conjunction with ethical principles that define the proper distribution of welfare between present and future generations.     

Wealth Effects, Distribution, and the Theory of Organization

We construct a general equilibrium model of firm formation in which organization is endogenous. Firms are coalitions of agents providing effort and investment capital. Effort is unobservable unless a fixed monitoring cost is paid, and borrowing is subject to a costly state verification problem. Because incentives vary with an agent's wealth, different types of agents become attractive firm members under different circumstances. When borrowing is not costly, firms essentially consist of one type of agent and are organized efficiently. But when the costly state verification problem is sufficiently severe, firm organization will depend on the distribution of wealth: with enough inequality, it will tend to be dictated by incentives of rich agents to earn high returns to wealth, even if the chosen organizational form is not a technically efficient way to provide incentives.Journal of Economic LiteratureClassification Numbers: D2, D31, J41, L2.     

Intergenerational Wealth Mobility in France, 19th and 20th Century

This paper examines intergenerational wealth mobility between fathers and children in France between 1848 and 1960. Considering wealth mobility in the long run requires taking into account not only positional mobility (that is, how families move within a given distribution of wealth), but also structural mobility induced by changes in the distribution of wealth. Such changes are related to two structural phenomena: in the nineteenth century, the rising number of individuals leaving no estate at death and, after World War I, the decline in the number of the very rich who could live off their wealth. The paper studies the movements between these groups and estimates the intergenerational elasticity of wealth, taking into account the persistence at the bottom and at the top.     

Poverty Traps, Indeterminacy, and the Wealth Distribution

We consider a one-sector growth model in continuous time with a production externality and endogenous labor supply. There is a continuum of households who have identical preferences but differ with respect to their initial wealth. We show that there exist economies such that an indeterminate steady state exists for some wealth distribution but not for others. A second result is that a redistribution of wealth may drive the economy from a steady state with strictly positive output to a poverty trap in which output converges asymptotically to zero. These results indicate that differences in the wealth distribution may be responsible for drastic differences in the long-run standard of living. Journal of Economic Literature Classification Numbers: D31, D50, O41.     

Birth,Death, and Consumption: Overlapping Generations and the Random Walk Hypothesis

This paper studies the time-series behavior of consumption in a model that incorporates birth, death, and a precautionary motive for saving. Consumption of an individual agent is a random walk. However, aggregate consumption is a random walk if and only if the sum of the death rate and population growth rate is zero. Failure of the random walk hypothesis should not be attributed to finite horizons perse, but rather to inter-generational transfers caused by birth and death. Unlike certainty-equivalent models, the expected growth of consumption depends on financial wealth, rather than wage income or human capital. [D91, E21]     

Education for the masses? The interaction between wealth,educational and political inequalities

This paper presents a simple model of distribution dynamics, in which the distributions of wealth, education and political power are circularly endogenous. Different levels of education translate into different income and wealth levels. Political power may (or may not) vary with wealth, and in turn affects decisions on the level of public expenditure on education. Since the market for education credit is imperfect, some people might need to rely on public schooling, the quality of which depends on those expenditure levels. As a result, educational opportunities differ along the wealth distribution. The dynamic system displays multiple equilibria, some of which are characterized by a vicious circle of interaction between educational, wealth and political inequalities. These particular equilibria, which are more unequal, are also shown to be inefficient in terms of aggregate output levels. Switching equilibria may be achieved through redistribution of political power.
JEL classification: D31, D63.     

Survival of the gene,intergenerational transfers and precautionary saving

This paper provides a model of bequest and investment in children's human capital at low incomes. It posits that parents and children are linked through their common concern of grandchildren and intergenerational transfers provide a material basis for the perpetuation of the family line. The model characterizes intergenerational strategic interactions in a dynamic game theoretical framework. Moreover, it explores intergenerational uncertainty as a source of precautionary saving. In contrast with the existing literature, the model implies that there are qualitative differences between precautionary saving from one's own income uncertainty and precautionary bequests from children's income uncertainty.     

Entrepreneurship,Saving, and Social Mobility

This paper examines entrepreneurship in order to analyze, first, the degree to which the opportunity to start or own a business affects the household's saving behavior and the implication of this behavior for the distribution of wealth and, second, the relationship between the extent of entrepreneurship in the economy and socioeconomic mobility, that is, the movement of families across wealth classes over time.First, a number of stylized facts based on data from the Panel Study of Income Dynamics and the Survey of Consumer Finances are outlined. They show relevant differences in asset holdings and wealth mobility between entrepreneurs and workers. Second, a dynamic general equilibrium model with an explicit formalization of the entrepreneurial choice is developed. Through the modeling of the entrepreneurial activities, the model generates a concentration of wealth similar to the one observed in the U.S. economy and it replicates the main patterns of wealth mobility in which entrepreneurs experience higher upward mobility than workers. Journal of Economic Literature Classification Numbers: E21, D31, J23     

Economic Dynasties with Intermissions

We consider a model of successive generations with a fixed proportion of selfish and altruistic members in each individual's offspring. In contrast with the others, selfish members bequeath nothing to their own children. We assume that parents cannot recognize their heirs' types and that negative bequests are forbidden. We study Markov perfect equilibria of this multistage game of incomplete information and their implications for wealth distribution.Journal of Economic LiteratureClassification Numbers: D31, D64, D91, H63.     

A SAVINGS SUBSIDISATION SYSTEM IN A MODEL OF ENDOGENOUS FERTILITY AND ENDOGENOUS GROWTH: AN EXTENSION OF WIGGER (1999)

Population ageing is now an established demographic characteristic of many economies. Economists working in the endogenous growth theory tradition have sought to model the relationship between public pensions, financed on a 'Pay-As-You-Go' basis, and the growth in per capita incomes. The resultant intergenerational wealth redistribution from young to older people seems to decrease private savings, diminish capital accumulation, and lower the growth of per capita incomes. The underlying transmission mechanism appears to be a crowding out effect in private capital markets contingent upon the introduction of public pension systems. A growing literature exists on the interrelationships between public pension schemes, fertility rates and endogenous growth. Following Wigger's (1999) pioneering overlapping generations endogenous growth model, we extend this model to examine the effects of a savings subsidisation system on the rate of per capita income growth, fertility and voluntary intrafamily wealth transfers, where parents view children both as an insurance good and a consumption good. Moreover, children care about the consumption levels of their parents. An increase in contributions to a savings subsidised public pension scheme will crowd out private intergenerational transfers from the young to the old and thereby negate the usefulness of children as an insurance good.     

Parental Wealth and the Black–White Mobility Gap in the U.S.

Utilizing longitudinal data from the Panel Study of Income Dynamics (PSID), this paper examines the relationship between parental wealth and intergenerational income mobility for black and white families. I find that total parental wealth is positively associated with upward mobility for low‐income white families, but is not associated with reduced likelihood of downward mobility for white families from the top half of the income distribution. Conversely, I find that total parental wealth does not have the same positive association for low‐income black families, while home ownership may have negative associations with the likelihood of upward mobility for these families. However, for black families from the top half of the income distribution, home equity is associated with a decreased likelihood of downward mobility, suggesting a heterogeneous relationship between home ownership and mobility for black families.     

Choosing between gifts and bequests: How taxes affect the timing of wealth transfers

A number of theories have been advanced to explain the size and timing of intergenerational transfers. One factor only recently explored is the effects of taxes, and in particular the estate tax, on such transfers. This paper represents the first attempt to explore how capital gains and gift taxes, in addition to the estate tax, interact to influence incentives in the timing of transfers. Using estate tax data and exploiting variations in state inheritance, gift, and capital gains tax rates, this paper finds taxes to be an important consideration in the choice between gifts and bequests. In particular, each of capital gains and gift taxes are found to be important determinants of the timing of transfers. These findings are robust to a number of specifications that control for borrowing, charitable bequests, marital status, and the portfolio composition of wealth transfers.     

The Law of Primogeniture and the Transition from Landed Aristocracy to Industrial Democracy

We study the connection between inheritance systems and the historical evolution of the relationship between a society’s economic structure and its political system, with a focus on Europe from feudal times. The model predicts that, in an early agrarian phase, aristocratic political systems prevail, while democracies tend to emerge with industrialization. At the same time, as indivisible landed estates are replaced by capital as the primary source of wealth, the inheritance system evolves endogenously from primogeniture to partition. The dynamics of output, distribution, class structure and political participation are in turn reinforced by the system of intergenerational wealth transmission, with primogeniture tending to concentration and partition to equalization. “But the law of inheritance was the last step to equality.” Alexis de Tocqueville, Democracy in America (1835).     

Social Mobility: The Barro–Becker Children Meet the Laitner–Loury Dynasties

I compare the predictions of two types of dynastic models for the persistence of wealth across generations: models that focus on uninsurable risk and intergenerational consumption smoothing but abstract from the fertility decision, such as Loury and Laitner, and models without risk that focus on the fertility decision, such as Becker and Barro. I show that when both uninsurable risk and fertility decisions are present, a striking result obtains: wealthier parents have more children, but the transfer to each child is independent of wealth. Since this result is counterfactual, I also discuss extensions that can resurrect persistence.Journal of Economic LiteratureClassification Numbers: C61, D31, D1, J13     

Is Social Security Really Bad for Growth?

This paper develops a model of endogenous growth with overlapping generations to investigate the joint determination of social security, public investment, and growth in a small open economy. We show that a pure pay-as-you-go system with benefits indexed to wages provides taxpayers with incentives to support growth-oriented policies, which increase the future productivity of labor. We find that outcomes characterized by positive levels of intergenerational redistribution, public investment, and long-run growth can be sustained as subgame-perfect Nash equilibria of an infinitely repeated intergenerational game, if and only if the marginal productivity of public capital is large enough. Furthermore, we show that transfers comove with public investment and growth. Journal of Economic Literature Classification Numbers: E62, H55.     

Family Transfers Involving Three Generations

Most models of family transfers consider only two generations and focus on two motives: altruism and exchange. They also assume perfect substitution between inter-vivos downward transfers and bequests. Based on French evidence, we show that parent-to-child transfers belong to three distinct categories (investment in child's education, financial assistance, wealth transmission), and advocate a three -generation framework. Thus, transfer behavior of parents toward their children is strongly influenced by the behavior of their own parents. There is also some evidence of the Cox and Stark demonstration effect: parents help their own parents, expecting to receive comparable support from their children. Such behavior can be regarded as indirect reciprocity : the beneficiary does not give back to the initial giver but to a third person of another generation.
JEL classification : D 10; D 31; D 63; D 64     

INCOME AND WEALTH INEQUALITY: EVIDENCE AND POLICY IMPLICATIONS

Drawing on the author's work, this lecture presents evidence on U.S. income and wealth inequality. It presents series for top income and wealth shares, and the distribution of economic growth by income groups. It discusses the mechanisms behind the evolution of U.S. income and wealth inequality from historical and comparative perspectives. It analyzes the role of public policy and in particular taxation in the evolution of inequality. (JEL D31, F66, J24)     

Transfer and Life-cycle Wealth in Japan, 1974–1984

In this paper I use the cumulation-of-life-cycle saving method to measure the contribution of transfers to total wealth accumulation over the 1974 to 1984 period among worker households in Japan. I find that under either the Modigliani or Kotlikoff and Summers definitions of transfer wealth, capital accumulation for these households is largely the result of life-cycle saving. This study differs from earlier papers on this topic, which drew similar conclusions, by its close application of the two definitions of transfer wealth and by its extensive use of simulation analysis.
JEL Classification Numbers: D12 D91 E21