Presentation by Richard A. Benton (University of Illinois) OECD Conference on wealth inequalities: Measurement and policies Paris, 26 April 2018.

1. Exploring The Long Run Wealth Effects of Inheritances.
Richard A. Benton1 Lisa A. Keister2
1School of Labor and Employment Relations
University of Illinois
2Department of Sociology
Duke University
2018
Benton, Richard (University of Illinois) Wealth and Inheritances 2018 1 / 19

2. Inheritances and Wealth Inequality
Broadly assumed that inheritances and other inter-generational wealth
transfers play an important role in increasing and sustaining wealth
inequality.
Inheritances are a prominent means for families to pass on their
wealth to future generations.
Inheritance values are highly unequal, even more so than wealth or
income.
Inheritances are thought to contribute to the rigidity of the wealth
distribution.
Benton, Richard (University of Illinois) Wealth and Inheritances 2018 2 / 19

3. Inheritances and Wealth Inequality
However, recent evidence questions this relationship.
Most inheritances are received in middle or later life, after individuals
have accumulated the bulk of their wealth (Wolff 2015).
Inheritances comprise a larger portion of total wealth for less wealthy
households.
Other variables, like education, better explain inter-generational
wealth correlations (Pfeffer and Killewald).
Benton, Richard (University of Illinois) Wealth and Inheritances 2018 3 / 19

4. Inheritances and Wealth Trajectories
We enter this debate by examining heterogeneity in how households
accumulate additional wealth following a transfer.
Households exhibit considerable variation in what they do with transfers.
Some households use inheritances to build wealth, particularly by
facilitating home-ownership and entrepreneurship (Spilerman and
Wolff 2012; Holtz-Eakin et al 1994).
Other households spend down inheritances through a combination of
increased consumption and dissaving (Nau and Tumin 2012).
Benton, Richard (University of Illinois) Wealth and Inheritances 2018 4 / 19

5. Inheritances and Wealth Trajectories
What explains variation in households’ ability to convert transfers into
long-term wealth?
Cumulative advantage process—greater initial resources allow
households to convert inheritances into greater wealth gains.
Financial vulnerability—financial hardships interrupt the wealth
accumulation process and prevent households from converting
inheritances into greater wealth gains.
Benton, Richard (University of Illinois) Wealth and Inheritances 2018 5 / 19

6. Inheritances and Wealth Trajectories: Human Capital
We focus on two factors that are likely to explain heterogeneity in wealth
accumulation trajectories following an inheritance: human capital
acquisition and family formation.
Human capital: education is associated with wealth accumulation
Directly, by improving financial literacy and investment behavior.
Indirectly, through income and occupation characteristics
H1: Educational attainment improves households’ likelihood of converting
inheritances into greater wealth.
Benton, Richard (University of Illinois) Wealth and Inheritances 2018 6 / 19

7. Inheritances and Wealth Trajectories: Family Formation
Family formation: the U.S. stratification system rewards marriage and
delayed childbearing.
Marriage allows individuals to pool financial resources and supports
transmission of social status via homogamy within socioeconomic
brackets.
Divorce introduces financial hardships, such as legal fees, divided
assets, maintaining separate households etc.
H2: Married households convert inheritances into greater wealth.
H3: Divorced households are less able to convert inheritances into greater
wealth as compared to those who remain married.
Benton, Richard (University of Illinois) Wealth and Inheritances 2018 7 / 19

8. Inheritances and Wealth Trajectories: Family Formation
Family formation: the U.S. stratification system rewards marriage and
delayed childbearing.
Given the weakness of the U.S. parental supports, early childbearing
places greater financial hardships on individuals, particularly women.
Early childbearing increases expenses, prevents saving, and interrupts
status attainment process.
H4: Delayed fertility improves household’s capacity to convert inheritances
into greater wealth.
Benton, Richard (University of Illinois) Wealth and Inheritances 2018 8 / 19

9. Data and Methods
Panel Study of Income Dynamics (PSID)
Long running panel survey of households in the U.S. since 1968.
We use the panel structure to track household wealth as time elapses
following an inheritance.
Our sample includes households reported receiving at least one
inheritance or inter vivos gift.
2,563 households; 11,097 household-years – average household
contributes 6.74 observations over 11 waves
DV: logged total household net worth (adjusted 2013 dollars). Alternative
analysis examined the inverse hyperbolic sine transformation.
Benton, Richard (University of Illinois) Wealth and Inheritances 2018 9 / 19

10. Data and Methods
We estimate current net worth as a function of time elapsed since an
inheritance.
In 1984, the PSID asked respondents about whether they had ever
inherited money or property, the year the inheritance was received,
and the value of the inheritance at that time.
In 1989, respondents were asked about inheritances received in the
past five years. Similar questions asked again in 1994 and 1999 and
the biennially thereafter.
We use this question series to construct household level measures for:
1) The year of the family’s largest most recent transfer. 2) The value of
that transfer. 3) The number of years elapsed since the transfer was
received 4) The household head’s age when the transfer was received.
Benton, Richard (University of Illinois) Wealth and Inheritances 2018 10 / 19

11. Descriptive Results
For each receiving household, we calculated the difference in inflation
adjusted total net worth between the years before and after transfer
receipt.
The median household experienced a wealth boost of $40,036
Maximum: $1.7 Million
Minimum: Net loss of $2.3 Millions
Interquartile range: net loss of $11,593 to a gain of $176,942
Most households experienced wealth gains during a transfer receipt but
there is substantial variation in whether households are able to build
wealth from inheritances.
Benton, Richard (University of Illinois) Wealth and Inheritances 2018 11 / 19

12. Main Results
H1: Educational attainment improves households’ likelihood of converting
inheritances into greater wealth.
1515.0515.115.1515.215.25
PredictedLn(adjustednetworth)
0 10 20 30 40
Years elapsed following an inheritance
High school Some college
College degree Post-grad
Current Net Worth, Inheritances, and Education
Benton, Richard (University of Illinois) Wealth and Inheritances 2018 12 / 19

13. Main Results
H2: Married households convert inheritances into greater wealth.
15.0415.0615.0815.1
Predictedln(networth)
0 5 10 15 20 25 30
Years elapsed following an inheritance
Not Married Married
Current Net Worth, Inheritances, and Marriage
Benton, Richard (University of Illinois) Wealth and Inheritances 2018 13 / 19

14. Main Results
H3: Divorced households are less able to convert inheritances into greater
wealth as compared to those who remain married.
15.0415.0615.0815.115.12
Predictedln(networth)
0 5 10 15 20 25 30
Years elapsed following an inheritance
Still Married Ended in Widowhood
Ended in Divorce
Current Net Worth, Inheritances, and Status of First Marriage
Benton, Richard (University of Illinois) Wealth and Inheritances 2018 14 / 19

15. Main Results
H4: Delayed fertility improves household’s capacity to convert inheritances
into greater wealth.
15.0415.0615.0815.115.12
Predictedln(networth)
0 5 10 15 20 25 30
Years elapsed following an inheritance
20 26
32
Age at First Birth
Current Net Worth, Inheritances, and Age at First Birth
Benton, Richard (University of Illinois) Wealth and Inheritances 2018 15 / 19

16. Supplementary Analysis
Examined whether inheritances predict changes in family formation (in the
past and expectant heirs) – null findings.
Examined liquidity constraints prior to the receipt of a transfer (¡ 2 months
income in savings). Liquidity constrained households may spend down
transfers faster than households with liquid assets.
Inheritance size: The main regression models control for inheritance size.
We also examine whether the hypothesized effects vary across large and
small inheritance recipients.
Benton, Richard (University of Illinois) Wealth and Inheritances 2018 16 / 19

17. Conclusions
Households exhibit heterogeneous wealth accumulation trajectories
following an inheritance.
These trajectories are shaped by many of the same factors that affect
status attainment and wealth accumulation more broadly.
We focus on educational attainment and family formation.
Households who are best positioned to build wealth, by virtue of their
human capital and family characteristics, also benefit the most from
receiving an inheritance.
Benton, Richard (University of Illinois) Wealth and Inheritances 2018 17 / 19

18. Future research
Detailed data on asset portfolios and asset mixes of bequests/gifts.
Investment strategy and behavior – what are households doing that
leads to these divergent trajectories.
Other dimensions of wealth accumulation heterogeneity. (cohorts,
race, others).
Benton, Richard (University of Illinois) Wealth and Inheritances 2018 18 / 19

19. Thank You
Richard A. Benton – rabenton@illinois.edu
Lisa A. Keister – lkeister@soc.duke.edu
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