Intergenerational wealth transmission in Great Britain

We document the intergenerational wealth transmission between adult offspring and their parent's using the Wealth and Assets Survey for Great Britain. We estimate an intergenerational wealth elasticity of 0.4 and Rank-Rank elasticity of 0.3 and find intergenerational wealth transmission for individuals in their 60s is lower than for those currently aged in their 30s and early 40s, though rank based estimates are stable. Our estimation results imply that the intergenerational wealth elasticity is 3.8 percentage points higher when comparing people with those the same age 6 years previously suggesting strong evidence of higher intergenerational wealth persistence in younger age cohorts. Taken together, the findings have important implications for future wealth inequalities and must be addressed.     

Optimal Taxation of Bequests in a Model with Initial Wealth*

We formulate an optimal‐taxation model where parents leave bequests to their descendants for altruistic reasons. In contrast to the standard model, individuals differ not only in earning abilities, but also in initial (inherited) wealth. In this model, a redistributive motive for an inheritance tax – which is equivalent to a uniform tax on all expenditures – arises, given that initial wealth increases with earning abilities. The introduction of the inheritance tax either increases intertemporal social welfare or has an ambiguous effect, depending on whether the external effect related to altruism is accounted for in the social objective.     

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.     

The Inherited Inequality: How Demographic Aging and Pension Reforms can Change the Intergenerational Transmission of Wealth

The role of inherited wealth in modern economies has increasingly come under scrutiny. This study presents one of the first attempts to shed light on how demographic aging could shape this role. It shows that, in the absence of retirement annuities, or for a given level of annuitization, both increasing longevity and decreasing fertility should reduce the inherited share of total wealth in a given economy. Thus, aging is not likely to explain a recent surge in this share in some advanced economies. Shrinking retirement annuities, however, could offset and potentially reverse these effects. The paper also shows that individual bequests will be more unequally distributed if aging is driven by a drop in fertility. In comparison, the effect of increasing longevity on their distribution is non‐monotonic.     

Accounting for Cross‐Country Differences in Wealth Inequality

There is considerable cross‐country variation in levels of household wealth and in wealth inequality. This paper assesses the extent to which these differences can be accounted for by differences in the distributions of households' demographic and economic characteristics. A counterfactual decomposition analysis of micro data from five countries (Italy, U.K., U.S., Sweden and Finland) is used to identify the effects of characteristics on component wealth holdings, their value and their distribution. The findings of the paper suggest that the biggest share of cross‐country differences is not attributable to the distribution of household demographic and economic characteristics but rather reflect strong unexplained country effects.     

The Gender Wealth Gap Across European Countries

This paper studies the gap in wealth between male and female single households using 2010 Household Finance and Consumption Survey data for eight European countries. In the raw data, a large gap emerges at the upper end of the unconditional distribution. While OLS estimates show no difference in average net wealth levels, quantile regressions at the 95th percentile yield mixed evidence for the gender wealth gap in different specifications. Labour market characteristics and participation in asset and debt categories largely explain the differences between male and female single households. The gender gap in net wealth is driven by gaps in gross wealth and its components, but is attenuated in four countries by gender gaps in (collateralized) debt. In the full specification, the unexplained gap in gross wealth amounts to 27 percent in Slovakia, 33 percent in France, 44 percent in Austria, 45 percent in Germany, and 48 percent in Greece.     

Top Wealth Shares in Australia 1915–2012

Combining data from surveys, inheritance tax records, and rich lists, we estimate top wealth shares for Australia from World War I until the present day. We find that the top 1 percent share declined by two‐thirds from 1915 until the late 1960s, and rose from the late 1970s to 2010. The recent increase is sharpest at the top of the distribution, with the top 0.001 percent wealth share tripling from 1984 to 2012. The trend in top wealth shares is similar to that in Australian top income shares (though the drop in the first half of the twentieth century is larger for wealth than income shares). Since the early twentieth century, top wealth shares in Australia have been lower than in the U.K. and U.S.     

Inadequate Bivariate Measures of Health Inequality: The Impact of Income Distribution*

Bivariate measures of health inequality are influenced by changes in two variables: health and a socioeconomic variable, such as income. For these measures, what is reported as an increase in health inequality might just as well be a reduction in income inequality. In particular, several papers have found that socioeconomic health inequalities in Nordic countries are no less than in other European countries. The correct interpretation could just be that income inequality is no higher in Nordic countries than in the rest of Europe. The problem is especially profound when the causality is running from health to income.     

Private Wealth in a Developing Country:Evidence from South Africa

The point of departure of Piketty's influential Capital in the Twenty‐First Century (2014) was the dramatic growth of private wealth‐income ratios in advanced economies between 1970 and 2010. Using official balance sheet data for South Africa—the first country to publish such data in the developing world—, this paper examines to what extent this re‐emergence of private wealth was also experienced in the developing‐country context. First, we find that the South African current wealth‐income ratio is very close to its 1975 level, and much lower than those of Piketty's sample of advanced economies. Second, we show that the discrepancy is explained not only by South Africa's relatively low savings rates, but also by the reduction of wealth before and during the transition to democracy in the 1990s. Since then, private wealth recovered significantly, but the U‐shaped relationship does not support the argument that there is a clear correlation between the capital‐income ratio and capital share.     

Wealth Concentration over the Path of Development: Sweden, 1873–2006*

We study wealth concentration in Sweden over 130 years, from the beginning of industrialization until the present day. Our series are based on new evidence from estate and wealth tax data, foreign and domestic family firm‐wealth, and pension wealth estimates. We find that Swedish wealth concentration was high in the agrarian state, and changed little during early industrialization. From World War I until about 1950, the richest percentile lost ground to high‐income earners in the rest of the top‐wealth decile. This equalization continued postwar; the entire top decile lost‐out relative to the rest of the population. Around 1980, wealth compression stopped and inequality increased. We approximate the effects of international flows and find that the recent increase in wealth inequality is probably larger than what official estimates suggest.     

The Great Recession,Austerity and Inequality: Lessons from Ireland

The advent of the Great Recession and the widespread adoption of fiscal austerity policies have heightened concern about inequality and its effects. We examine how the distribution of income in Ireland—a country which experienced one of the most severe economic contractions—has evolved over the years 2008 to 2013. Standard cross‐sectional analysis of the income distribution shows broad stability in the Gini coefficient and in decile shares, with one main exception: the share of the bottom decile fell sharply, with the largest fall in average incomes being for that group. Longitudinal analysis shows that the falls in the average income for the bottom decile were not due to decreasing income for those remaining in the bottom decile, but to falls in income from those initially located in higher deciles. The extent of redistribution through taxes and transfers increased strongly, as measured by the Reynolds‐Smolensky index, which rose from 0.20 before the onset of the crisis to 0.27 in 2013. Analysis indicates that about three‐quarters of this increased redistribution is due to automatic stabilisers and one‐quarter to discretionary policy changes.     

Wealth inequality and financial inclusion: Evidence from South African tax and survey records

Theoretical models show that financial inclusion reduces wealth inequality. Existing empirical models are restricted to estimates using income inequality because of a lack of cross country wealth inequality data. We used 2010-11 and 2014-5 waves of the National Income Dynamics Study combined with South African tax records to estimate wealth and income inequality. Using Re-centered Influence Function regressions on the micro-level records, we confirmed the negative cross-country relationship between financial inclusion and income inequality. Wealth inequality is different. Financial inclusion improved wealth shares of only the middle class. Because of predatory lending, expansion of credit reduced the wealth share of the poor. Improved savings by the middle class, providing better oversight over financial services targeted at the poor and removing impediments to the small business sector are pre-conditions for financial inclusion to reduce wealth inequality.     

Relative Income and Indebtedness: Evidence from Panel Data

We examine patterns of indebtedness in the Panel Study of Income Dynamics, focusing on the period surrounding the housing bubble and its aftermath (i.e., 1999–2009). Leverage increased across households, but most quickly among lower income households during this period. We find additionally that leverage grew faster for households with lower relative income compared to other households in similar demographic groups or within a state controlling for own income. Together, these findings provide evidence for the thesis that the rising indebtedness of households in the U.S. is related to high levels of inequality, and that “Veblen effects,” whereby relative income matters for individual well‐being and decisions, may contribute to rising household indebtedness.     

House Prices,Wealth and Consumption: New Evidence from Australia and Canada

Over the past two decades, a number of countries have experienced appreciation in house prices at the same time that aggregate consumption has increased. This paper tests alternative hypotheses for this phenomenon by using repeated household surveys from Australia and Canada to identify the transmission mechanism that links consumption and household wealth. The empirical analysis suggests that neither a direct wealth effect nor a common causal factor likely accounts for the observed correlation between wealth and consumption in these two countries. Rather, indirect factors such as collateral effects arising from relaxation of credit constraints are a more likely explanation.     

The Joint Distribution of Net Worth and Pension Wealth in Germany

The research on wealth inequality has generally focused on real and financial assets, while giving little attention to pension wealth: the present value of future pension entitlements from public and company pension schemes. This is surprising given the important role pension plans play in guaranteeing material security and well‐being for a majority of the population, and suggests that they should be accounted for in peoples’ wealth portfolios. Using novel data from the Socio‐Economic Panel (SOEP), we study the incidence, relevance, and distribution of individual pension wealth, net worth, and augmented wealth (the sum of the two) in Germany. Further, we investigate age‐wealth profiles and differences between East and West Germany.     

The Gender Wealth Gap in Europe: Application of Machine Learning to Predict Individual-level Wealth

This article provides comparative estimates of the gender wealth gaps for 22 European countries, employing data from the Household Finance and Consumption Survey. The data on wealth are collected at the household level, while individual-level data are needed for the estimates of gender wealth gaps. We propose a novel approach using machine learning and model averaging methods to predict individual-level wealth data for multi-person households. Our results suggest that random forest performs best as the predicting tool for this exercise, outperforming elastic net and Bayesian model averaging. The estimated gender wealth gaps tend to be in favor of men, especially at the top of the wealth distribution. Men have 24 percent more wealth than women on average. We also find that a high home ownership rate is associated with a smaller country-level gender wealth gap. Our estimates suggest that the individual-level wealth inequality is on average 3 pp higher than the household-level wealth inequality in multi-member households.     

Effects of Aspirations and Habits on the Distribution of Wealth

We analyze how the introduction of habits and aspirations affects the distribution of wealth when the labor productivity of individuals is subject to idiosyncratic shocks and when bequests arise from a joy‐of‐giving motive. In the presence of either bequests or aspirations, labor income shocks are transmitted intergenerationally, and this transmission, together with contemporaneous shocks, determines the distribution of wealth. We show that the introduction of aspirations (habits) decreases (increases) the average wealth, and increases (decreases) both its intragenerational variability and the degree of intergenerational mobility. Therefore, a distinction between aspirations and habits is relevant because they involve different implications for the distribution of wealth.     

Correcting for the Missing Rich: An Application to Wealth Survey Data

It is a well‐known criticism that if the distribution of wealth is highly concentrated, survey data are hardly reliable when it comes to analyzing the richest parts of society. This paper addresses this criticism by providing a general rationale of the underlying methodological problem as well as by proposing a specific methodological approach tailored to correcting the arising bias. We illustrate the latter approach by using Austrian data from the Household Finance and Consumption Survey. Specifically, we identify suitable parameter combinations by using a series of maximum‐likelihood estimates and appropriate goodness‐of‐fit tests to avoid arbitrariness with respect to the fitting of the Pareto distribution. Our results suggest that the alleged non‐observation bias is considerable, accounting for about one quarter of total net wealth in the case of Austria. The method developed in this paper can easily be applied to other countries where survey data on wealth are available.     

The Sins of the Fathers: Intergenerational Income Mobility in China

This paper aims to obtain an accurate estimate of China's intergenerational income mobility and to present evidence on its distributional pattern. Using panel data from the China Health and Nutrition Survey (CHNS) over the period 1989–2009, I find that China is less mobile than most developed countries. Then, I employ five different approaches to investigate the distributional pattern of China's intergenerational mobility across income levels. The results suggest that poor families have relatively high mobility, indicating opportunities for the poor children to escape poverty. Finally, I show that while wealthy fathers are likely to pass on their favorable economic status to their sons, rich sons come from a very wide range of family economic backgrounds.     

Understanding Changes in the Distribution and Redistribution of Income: A Unifying Decomposition Framework

In recent decades income inequality has increased in many developed countries but the role of tax and transfer reforms is often poorly understood. We propose a new method allowing for the decomposition of historical changes in income distribution and redistribution measures into: (i) the immediate effect of tax‐transfer policy reforms in the absence of behavioral responses; (ii) the effect of labor supply responses induced by these reforms; and (iii) a third component allowing us to explore the effect of changes in the distribution of a wide range of determinants, including the effect of employment changes not induced by policy reforms. The application of the decomposition to Australia reveals that the direct effect of tax‐transfer policy reforms accounts for half of the observed increase in income inequality between 1999 and 2008, while the increased dispersion of wages and capital incomes also played an important role.