1 Comments on “How Inheritances Relate to Wealth Distribution? Theoretical Reasoning and Empirical Evidence on the Basis of LWS Data” Pietro Rizza Roma 6 July 2007

2 STARTING POINT Why do people bequest? Not an obvious question… Altruism Strategic exchange between parents and kids Unintended bequest Psychological / Sociological interpretations The Why-question focuses too much on intentions/decisions

3 A DIFFERENT QUESTION How do people bequeath and inherit? The authors suggest to use LWS data to provide descriptive statistics on inheritance On average heir households hold more financial assets, receive higher wages and are better educated Inheritance is an important factor in social inequality But this is not conclusive evidence about the link between inheritance and wealth inequality

4 WEALTH INEQUALITY AND BEQUESTS Theoretical research has identified many of the channels through which inheritances influence wealth inequality, but their relative importance is still unresolved Empirical analysis has been limited by the availability of reliable and comparable data.

5 UNRESOLVED QUESTION Does inequality in inherited wealth exacerbate wealth inequality? If so, by how much? 1.Meade (1976): Inheritance is a source of inequality in the distribution of wealth (also Harbury & Hitchens 1979; Wilhelm 1997). 2.Stiglitz (1969): Intergenerational transfers can be equalizing – a stable egalitarian distribution of wealth would emerge if inheritances were distributed evenly among all one’s children. 3.Becker and Tomes (1979) highlight the joint role of inheritances and earning power – intergenerational transfers are equalizing if the propensity of parents to transfer financial resources exceeds the correlation between parents’ and the child’s human capital. 4.Laitner (1979): with no inheritance of human capital, financial inheritances are equalizing if there is no assortative mating.

6 Determinants of inheritance inequality Affecting the amount received : Age of the parents at their death- Number of siblings sharing the bequest Parents’ accumulated wealth prior to death Affecting parents’ wealth accumulation : Earnings and the earning distribution Propensity to save and the rate of return on their savings Number of children to support – Parents’ inheritance Parents’ time preference A role also for : Annuitization of retirement savings through Social security Assortative mating Progressive income tax

7 A role for Social Security? Gokhale et al. (2000) - Simulation study Inheritance is largely unrelated to earning differences, therefore can be wealth-equalizing Inheritance is an important contributor to wealth inequality, but only in the presence of social security The share of annuitized savings/wealth is an important determinant of inheritance. This result suggests an empirical investigation of the link between pension wealth (annuitized wealth) and inheritance inequality.