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Wealth Accumulation in the U.S.: Do Inheritances and Bequests Play a Significant Role?

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Author Info

  • John Laitner

    (University of Michigan)

Abstract

This paper formulates an overlapping generations model with both life–cycle saving and altruistic bequests. For a given distribution of earning abilities, the model generates a stationary steady–state capital–to–labor ratio for the economy as a whole and a stationary distribution of net worth among households. We calibrate the model, using the 1995 Survey of Consumer Finances to fix the distribution of earning abilities, and using total 1995 U.S. wealth and Federal estate tax revenues to fix other key parameters. The analysis specifies its version of the Federal estate tax in detail, estimating the empirical degree of tax avoidance. Simulations show that the model can reproduce the high degree of wealth concentration evident in U.S. data. Most surprisingly, the analysis also suggests that the U.S. economy’s steady–state capital–to–output ratio will be insensitive to changes in the national debt and social security.

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File URL: http://www.mrrc.isr.umich.edu/publications/Papers/pdf/wp019.pdf
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Bibliographic Info

Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp019.

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Length: 50 pages
Date of creation: Nov 2001
Date of revision:
Handle: RePEc:mrr:papers:wp019

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References

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  1. Davies, James B, 1981. "Uncertain Lifetime, Consumption, and Dissaving in Retirement," Journal of Political Economy, University of Chicago Press, vol. 89(3), pages 561-77, June.
  2. Laurence J. Kotlikoff, 1998. "Simulating the Privatization of Social Security in General Equilibrium," NBER Chapters, in: Privatizing Social Security, pages 265-311 National Bureau of Economic Research, Inc.
  3. Bernheim, B Douglas & Shleifer, Andrei & Summers, Lawrence H, 1986. "The Strategic Bequest Motive," Journal of Labor Economics, University of Chicago Press, vol. 4(3), pages S151-82, July.
  4. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
  5. Laitner, John, 1993. "Intergenerational and interhousehold economic links," Handbook of Population and Family Economics, in: M. R. Rosenzweig & Stark, O. (ed.), Handbook of Population and Family Economics, edition 1, volume 1, chapter 5, pages 189-238 Elsevier.
  6. David Altig, 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June.
  7. John Laitner, 2001. "Secular Changes in Wealth Inequality and Inheritance," Working Papers wp020, University of Michigan, Michigan Retirement Research Center.
  8. Modigliani, Franco, 1985. "Life Cycle, Individual Thrift and the Wealth of Nations," Nobel Prize in Economics documents 1985-1, Nobel Prize Committee.
  9. John Laitner & F. Thomas Juster, 1993. "New evidence on altruism: a study of TIAA-CREF retirees," Discussion Paper / Institute for Empirical Macroeconomics 86, Federal Reserve Bank of Minneapolis.
  10. Gary S. Becker, 1974. "A Theory of Social Interactions," NBER Working Papers 0042, National Bureau of Economic Research, Inc.
  11. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  12. Martin Browning & Lars Peter Hansen & James J. Heckman, 1999. "Micro Data and General Equilibrium Models," Discussion Papers 99-10, University of Copenhagen. Department of Economics.
  13. B. Douglas Bernheim & Kyle Bagwell, 1989. "Is Everything Neutral?," NBER Working Papers 2086, National Bureau of Economic Research, Inc.
  14. Davies, James B, 1982. "The Relative Impact of Inheritance and Other Factors on Economic Inequality," The Quarterly Journal of Economics, MIT Press, vol. 97(3), pages 471-98, August.
  15. Benjamin M. Friedman & Mark Warshawsky, 1990. "The Cost of Annuities: Implications for Saving Behavior and Bequests," NBER Working Papers 1682, National Bureau of Economic Research, Inc.
  16. Orazio P. Attanasio & Martin Browning, 1993. "Consumption over the Life Cycle and over the Business Cycle," NBER Working Papers 4453, National Bureau of Economic Research, Inc.
  17. Laurence J. Kotlikoff & Lawrence H. Summers, 1980. "The Role of Intergenerational Transfers in Aggregate Capital Accumulation," NBER Working Papers 0445, National Bureau of Economic Research, Inc.
  18. James M. Poterba & Scott Weisbenner, 2000. "The Distributional Burden of Taxing Estates and Unrealized Capital Gains at the Time of Death," NBER Working Papers 7811, National Bureau of Economic Research, Inc.
  19. Jagadeesh Gokhale & Laurence J. Kotlikoff & James Sefton & Martin Weale, 1998. "Simulating the transmission of wealth inequality via bequests," Working Paper 9811, Federal Reserve Bank of Cleveland.
  20. Charles T. Carlstrom & David Altig, 1999. "Marginal Tax Rates and Income Inequality in a Life-Cycle Model," American Economic Review, American Economic Association, vol. 89(5), pages 1197-1215, December.
  21. King, M A & Dicks-Mireaux, L-D L, 1982. "Asset Holdings and the Life-Cycle," Economic Journal, Royal Economic Society, vol. 92(366), pages 247-67, June.
  22. Becker, Gary S & Tomes, Nigel, 1979. "An Equilibrium Theory of the Distribution of Income and Intergenerational Mobility," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1153-89, December.
  23. Joseph G. Altonji & Fumio Hayashi & Laurence Kotlikoff, 1995. "Parental Altruism and Inter Vivos Transfers: Theory and Evidence," NBER Working Papers 5378, National Bureau of Economic Research, Inc.
  24. Loury, Glenn C, 1981. "Intergenerational Transfers and the Distribution of Earnings," Econometrica, Econometric Society, vol. 49(4), pages 843-67, June.
  25. Laitner, John, 1991. "Modeling Marital Connections among Family Lines," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1123-41, December.
  26. Laitner, John, 1992. "Random earnings differences, lifetime liquidity constraints, and altruistic intergenerational transfers," Journal of Economic Theory, Elsevier, vol. 58(2), pages 135-170, December.
  27. Wolff, Edward N, 1996. "International Comparisons of Wealth Inequality," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 42(4), pages 433-51, December.
  28. Friedman, Benjamin M & Warshawsky, Mark J, 1990. "The Cost of Annuities: Implications for Saving Behavior and Bequests," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 135-54, February.
  29. Mervyn A. King & Louis Dicks-Mireaux, 1982. "Asset Holdings and the Life Cycle," NBER Working Papers 0614, National Bureau of Economic Research, Inc.
  30. Modigliani, Franco, 1988. "The Role of Intergenerational Transfers and Life Cycle Saving in the Accumulation of Wealth," Journal of Economic Perspectives, American Economic Association, vol. 2(2), pages 15-40, Spring.
  31. Abel, Andrew B, 1985. "Precautionary Saving and Accidental Bequests," American Economic Review, American Economic Association, vol. 75(4), pages 777-91, September.
  32. Solon, Gary, 1992. "Intergenerational Income Mobility in the United States," American Economic Review, American Economic Association, vol. 82(3), pages 393-408, June.
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Citations

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Cited by:
  1. Anthony A. Smith, Jr., 2003. "The Research Agenda: Business Cycles and Inequality," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 4(2), April.
  2. Luisa Fuster & Ayşe İmrohoroğlu & Selahattin İmrohoroğlu, 2007. "Elimination of Social Security in a Dynastic Framework," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 113-145.
  3. Fang Yang, 2005. "Accounting for the heterogeneity in retirement wealth," Working Papers 638, Federal Reserve Bank of Minneapolis.
  4. Fang Yang, 2006. "Consumption along the life cycle: how different is housing?," Working Papers 635, Federal Reserve Bank of Minneapolis.
  5. John Laitner, 2001. "Wealth, Inequality, and Altruistic Bequests," Working Papers wp017, University of Michigan, Michigan Retirement Research Center.
  6. John Laitner, 2002. "Transition Paths and Social Security Reform," Working Papers wp025, University of Michigan, Michigan Retirement Research Center.
  7. Christoph Winter, 2009. "Accounting for the changing role of family income in determining college entry," IEW - Working Papers 402, Institute for Empirical Research in Economics - University of Zurich, revised Dec 2011.
  8. Lutz Hendricks, 2006. "How Important Is Discount Rate Heterogeneity for Wealth Inequality?," 2006 Meeting Papers 124, Society for Economic Dynamics.
  9. Shinichi Nishiyama, 2002. "Bequests, Inter Vivos Transfers, and Wealth Distribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(4), pages 892-931, October.
  10. Fang (Annie) Yang, 2006. "Consumption Over Life Cycle: How Different is Housing?," Discussion Papers 06-01, University at Albany, SUNY, Department of Economics.
  11. Jonathan Skinner & Stephen P. Zeldes, 2002. "The Importance of Bequests and Life-Cycle Saving in Capital Accumulation: A New Answer," American Economic Review, American Economic Association, vol. 92(2), pages 274-278, May.
  12. John Laitner, 2003. "Labor Supply Responses to Social Security," Working Papers wp050, University of Michigan, Michigan Retirement Research Center.
  13. Francisco Gomes & Alexander Michaelides, 2003. "Aggregate implications of defined benefit and defined contribution systems," LSE Research Online Documents on Economics 24868, London School of Economics and Political Science, LSE Library.
  14. John Laitner, 2004. "Precautionary Saving Over the Lifecycle," Working Papers wp083, University of Michigan, Michigan Retirement Research Center.

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