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The Correlation of Welath Across Generations

  • Kerwin Kofi Charles
  • Erik Hurst

This paper examines the similarity in wealth between parents and their children, and explores alternative explanations for this relationship. We find that the age-adjusted elasticity of child wealth with respect to parental wealth is 0.37, before the transfer of bequests. Lifetime income and ownership of particular assets, both of which exhibit strong intergeneration similarity, jointly explain nearly two-thirds of the wealth elasticity. Education, past parental transfers, and expected future bequests account for little of the remaining elasticity. Using new experimental evidence, we assess the importance of risk tolerance. The risk tolerance measures vary as theory would predict with the ownership of risky assets, and are highly correlated between parents and children. However, they explain little of the intergenerational correlation in the propensity to own different assets, suggesting that children's savings propensities are determined by mimicking their parents' behavior, or the inheritance of preferences not related to risk tolerance. Additionally, these risk tolerance measures explain only a small part of the remaining intergenerational wealth elasticity.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9314.

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Date of creation: Nov 2002
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Publication status: published as Charles, Kerwin Kofi and Erik Hurst. "The Correlation Of Wealth Across Generations," Journal of Political Economy, 2003, v111(6,Dec), 1155-1182.
Handle: RePEc:nbr:nberwo:9314
Note: LS
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