Wealth Inequality and Intergenerational Links

Empirical studies have shown that, for many countries, the distribution of wealth is much more concentrated than the one of labor earnings and that households with higher levels of lifetime income have higher lifetime saving rates. Previous models have had difficulty in generating these features. I construct a computable general equilibrium model with overlapping generations in which parents and children are linked by bequests and earnings persistence within families. I show that voluntary bequests are important to explain the emergence of large estates that characterize the top of the wealth distribution, while accidental bequests are not. In addition, the introduction of a bequest motive generates lifetime saving profiles more consistent with the data. Allowing for earnings persistence within families generates an even more concentrated wealth distribution. A cross-country comparison between the U.S. and Sweden shows that intergenerational linkages are important to explain the upper tail of the wealth distribution also in economies where redistribution programs are more prominent and there is less inequality. Moreover Sweden, with its generous social safety net, has a larger fraction of people with zero or negative wealth. The model is capable of reproducing this feature as well.