Working Paper: NBER ID: w9314
Authors: Kerwin Kofi Charles; Erik Hurst
Abstract: 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.
Keywords: Wealth; Intergenerational Transmission; Risk Tolerance
JEL Codes: J62; J12; G12; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Parental wealth (G51) | Child wealth (J13) |
| Lifetime income and ownership of particular assets (D14) | Child wealth (J13) |
| Education, past parental transfers, and expected future bequests (D14) | Child wealth (J13) |
| Risk tolerance measures (G11) | Child wealth (J13) |
| Parental behavior (J12) | Child savings propensities (D15) |