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Simulating the Transmission of Wealth Inequity via Bequests

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  • Jagadeesh Gokhale
  • Laurence J. Kotlikoff
  • James Sefton
  • Martin Weale

Abstract

This paper develops, calibrates, and simulates a dynamic 88-period OLG model to study the intergenerational transmission of U.S. wealth inequality via bequests. The model features marriage, realistic fertility patterns, random death, assortative mating based on skills, heterogeneous skill endowments, heterogeneous rates of return, skill inheritability, progressive income taxation, and resource annuitization via social security. All bequests arise from imperfect annuitization. Nonetheless, the model generates a realistic ration of aggregate wealth to aggregate labor income, a realistic bequest flow relative to the stock of wealth, and a realistic wealth distribution at retirement. Skill differences, assortative mating, social security, and the time preference are the primary determinants of wealth inequality. Bequests do propagate wealth inequality, but only in the presence of social security, which disproportionately disinherits the lifetime poor. Intergenerational wealth immobility, also considered here, is primarily determined by the inheritance of skills from one's parents and the magnification of the impact of this inheritance by marital sorting.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7183.

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Date of creation: Jun 1999
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Publication status: published as Gokhale, Jagadeesh, Laurence J. Kotlikoff, James Sefton and Martin Weale. "Simulating The Transmission Of Wealth Inequality Via Bequests," Journal of Public Economics, 2001, v79(1,Jan), 93-128.
Handle: RePEc:nbr:nberwo:7183

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