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Why Do Wealthy Parents Have Wealthy Children?

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  • Andreas Fagereng
  • Magne Mogstad
  • Marte Rønning

Abstract

Strong intergenerational associations in wealth have fueled a longstanding debate over why children of wealthy parents tend to be well off themselves. We investigate the role of family background in determining children’s wealth accumulation and investor behavior as adults. The analysis is made possible by linking Korean-born children who were adopted at infancy by Norwegian parents to a population panel data set with detailed information on disaggregated wealth portfolios and socio-economic characteristics. The mechanism by which these Korean- Norwegian adoptees were assigned to adoptive families is known and effectively random. We use the quasi-random assignment to estimate the causal effects from an adoptee being raised in one type of family versus another. Our findings show that family background matters significantly for children’s accumulation of wealth and investor behavior as adults, even when removing the genetic connection between children and the parents raising them. In particular, adoptees raised by wealthy parents are more likely to be well off themselves, whereas adoptees’ stock market participation and portfolio risk are increasing in the financial risk taking of their adoptive parents. The detailed nature of our data allows us to explore mechanisms, assess the generalizability of the lessons from adoptees, and compare our findings to results from behavioral genetics decompositions.

Suggested Citation

  • Andreas Fagereng & Magne Mogstad & Marte Rønning, 2018. "Why Do Wealthy Parents Have Wealthy Children?," CESifo Working Paper Series 6955, CESifo.
  • Handle: RePEc:ces:ceswps:_6955
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    Cited by:

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    2. Yonghong An & Wang Le & Ruli Xiao, 2015. "Your American Dream is Not Mine! A New Approach to Estimating Intergenerational Mobility Elasticities," CAEPR Working Papers 2015-016, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    3. Cheti Nicoletti & Kjell Salvanes & Emma Tominey, 2020. "Mothers working during preschool years and child skills. Does income compensate?," CEPEO Working Paper Series 20-08, Centre for Education Policy and Equalising Opportunities, UCL Institute of Education, revised Mar 2020.
    4. Claus Thustrup Kreiner & Søren Leth-Petersen & Louise Charlotte Willerslev-Olsen, 2020. "Financial Trouble Across Generations: Evidence from the Universe of Personal Loans in Denmark," Economic Journal, Royal Economic Society, vol. 130(625), pages 233-262.
    5. Simon Halphen Boserup & Wojciech Kopczuk & Claus Thustrup Kreiner, 2018. "Born with a Silver Spoon? Danish Evidence on Wealth Inequality in Childhood," Economic Journal, Royal Economic Society, vol. 128(612), pages 514-544, July.
    6. Anna Aizer & Paul J. Devereux & Kjell G. Salvanes, 2018. "Grandparents, Moms, or Dads? Why Children of Teen Mothers Do Worse in Life," NBER Working Papers 25165, National Bureau of Economic Research, Inc.
    7. Philipp Ager & Leah Platt Boustan & Katherine Eriksson, 2019. "The Intergenerational Effects of a Large Wealth Shock: White Southerners After the Civil War," NBER Working Papers 25700, National Bureau of Economic Research, Inc.
    8. Andreas Fagereng & Luigi Guiso & Davide Malacrino & Luigi Pistaferri, 2020. "Heterogeneity and Persistence in Returns to Wealth," Econometrica, Econometric Society, vol. 88(1), pages 115-170, January.
    9. Sandra E Black & Paul J Devereux & Petter Lundborg & Kaveh Majlesi, 2020. "Poor Little Rich Kids? The Role of Nature versus Nurture in Wealth and Other Economic Outcomes and Behaviours," Review of Economic Studies, Oxford University Press, vol. 87(4), pages 1683-1725.
    10. Adrian Adermon & Mikael Lindahl & Daniel Waldenström, 2018. "Intergenerational Wealth Mobility and the Role of Inheritance: Evidence from Multiple Generations," Economic Journal, Royal Economic Society, vol. 128(612), pages 482-513, July.
    11. Bertrand Garbinti & Frédérique Savignac, 2020. "Accounting for Intergenerational Wealth Mobility in France over the 20th Century: Method and Estimations," Working papers 776, Banque de France.
    12. N Lettinga & P O Jacquet & J-B André & N Baumand & C Chevallier, 2020. "Environmental adversity is associated with lower investment in collective actions," PLOS ONE, Public Library of Science, vol. 15(7), pages 1-23, July.
    13. Black, Sandra E. & Devereux, Paul J. & Lundborg, Petter & Majlesi, Kaveh, 2015. "Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth," IZA Discussion Papers 9227, Institute of Labor Economics (IZA).
    14. Lindsey Macmillan & Emma Tominey, 2019. "Parental Inputs and Socio-economic Gaps in Early Child Development," Working Papers 2019-065, Human Capital and Economic Opportunity Working Group.
    15. Sandra E. Black & Paul J. Devereux & Petter Lundborg & Kaveh Majlesi, 2017. "On the Origins of Risk-Taking in Financial Markets," Journal of Finance, American Finance Association, vol. 72(5), pages 2229-2278, October.
    16. Markussen, Simen & Røed, Knut, 2017. "Egalitarianism under Pressure: Toward Lower Economic Mobility in the Knowledge Economy?," IZA Discussion Papers 10664, Institute of Labor Economics (IZA).
    17. Brown, Martin & Henchoz, Caroline & Spycher, Thomas, 2018. "Culture and financial literacy: Evidence from a within-country language border," Journal of Economic Behavior & Organization, Elsevier, vol. 150(C), pages 62-85.
    18. Heinrich, Timo & Shachat, Jason, 2018. "The development of risk aversion and prudence in Chinese children and adolescents," MPRA Paper 86456, University Library of Munich, Germany.
    19. Adermon, Adrian & Lindahl, Mikael & Palme, Mårten, 2016. "Dynastic human capital, inequality and intergenerational mobility," Working Paper Series 2016:19, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    20. Knüpfer, Samuli & Rantapuska, Elias & Sarvimäki, Matti, 2017. "Why does portfolio choice correlate across generations," Research Discussion Papers 25/2017, Bank of Finland.
    21. Bernt Bratsberg & Andreas Kotsadam & Jo Thori Lind & Halvor Mehlum & Oddbjørn Raaum, 2019. "Election Turnout Inequality - Insights from Administrative Registers," CESifo Working Paper Series 7465, CESifo.
    22. Adermon, Adrian & Lindahl, Mikael & Palme, Mårten, 2016. "Dynastic human capital, inequality and intergenerational mobility," Working Paper Series 2016:19, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    23. Bertrand Garbinti & Frédérique Savignac, 2020. "Intergenerational Wealth Mobility in France over the 20th Century," NBER Chapters, in: Measuring and Understanding the Distribution and Intra/Inter-Generational Mobility of Income and Wealth, National Bureau of Economic Research, Inc.
    24. Andreas Fagereng & Luigi Guiso & Davide Malacrino & Luigi Pistaferri, 2020. "Heterogeneity and Persistence in Returns to Wealth," Econometrica, Econometric Society, vol. 88(1), pages 115-170, January.
    25. Brown, Martin & Henchoz, Caroline & Spycher, Thomas, 2017. "Culture and Financial Literacy," Working Papers on Finance 1703, University of St. Gallen, School of Finance.

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    More about this item

    Keywords

    intergenerational transmission; wealth; financial risk taking; family background;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion

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