Presentation at the HLEG thematic workshop on "Inequality of Opportunity", 14 January 2015, Paris, France, http://oe.cd/HLEG-workshop-inequality-opportunity-2015

1. Intergenerational wealth mobility
and the role of inheritance
Daniel Waldenström, Uppsala University
(joint with Adrian Adermon, UU, and Mikael Lindahl, UU)
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Presentation at OECD, Jan 14, 2015

2. Our study
We have two main questions:
1. Does personal wealth status persist over more than two
generations?
2. Of all the potential mechanisms driving persitence in personal
wealth across generations (ability, contacts, norms, luck),
what is the specific importance of inheritance?
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3. Previous literature
Wealth mobility
• Two-generational intergenerational elasticities (IGEs):
– US: Menchik (1979, wealthy, 0.7), Charles and Hurst (2003, PSID, 0.4),
Wahl (2003, top wealth, 0.6-0.8).
– Britain: Harbury and Hitchens (1979, wealthy families, 0.5)
• Three generational IGE
– US: Wahl (2gen, 0.6-0.8, 3gen 0.1).
– France: Arrondel and Grange (2006, 2gen 0.45, 3gen 0.3)
– Denmark: Halphern Boserup et al (2014, 2gen IGE 0.3, 3gen 0.1)
Role of inheritance
– No direct tests. Halphern Boserup et al find larger persistence when
parents have died. Charles and Hurst decompose wrt to transfers.
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4. Data
• Population:
– Survey of all third-graders in Sweden’s third largest city, Malmö, in 1938
– Index generation (b. 1928) followed with added info about parents (b.
≈1898), spouses, children (b. ≈1955) and grandchildren (b. ≈1980)
– We observe wealth, income, education of these individuals
• Wealth data:
– Wealth: Non-financial assets + Financial assets ‒ Debt
– Mid-life wealth (gen1‒4):
• Taxable wealth: by household, measured at ages 45-60 (gen1-3)
• Third-party reported wealth: individual, observed in the 2000s (gen3-4)
– Wealth at death (gen1-2):
• Estate inventory reports
• Problem: parents die at different times. How to control for this?
• Inheritance data:
– Inheritance tax reports: final taxable inheritance lot/heir.
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5. Method: How is wealth mobility measured?
• Standard 2-generational estimation of IG mobility:
𝑊𝑐ℎ𝑖𝑙𝑑 = 𝛼 + 𝛽𝑊𝑝𝑎𝑟𝑒𝑛𝑡 + 𝛿𝑋 + ε
– 𝛽 is called the intergenerational elasticity, a measure of transmission.
– 𝑊 can be in rank, in log, in IHS, in level
– X is vector of controls, mainly age (but also other things)
• We estimate 3- and 4-generational variants:
𝑊𝑐ℎ𝑖𝑙𝑑 = 𝛼 + 𝛽1 𝑊𝑝𝑎𝑟𝑒𝑛𝑡 + 𝛽2 𝑊𝑔𝑟𝑎𝑛𝑑𝑝. + 𝛿𝑋 + ε
𝑊𝑐ℎ𝑖𝑙𝑑 = 𝛼 + 𝛽1 𝑊𝑝𝑎𝑟𝑒𝑛𝑡 + 𝛽2 𝑊𝑔𝑟𝑎𝑛𝑑𝑝. + 𝛽3 𝑊𝑔𝑟𝑒𝑎𝑡𝑔𝑟𝑎𝑛𝑑𝑝. + 𝛿𝑋 + ε
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6. Method: How is the role of inheritance measured?
• We estimate the role of receiving inheritance 𝐵 by estimating:
𝑊𝑐ℎ𝑖𝑙𝑑 = 𝛼 + 𝛽1 𝑊𝑝𝑎𝑟𝑒𝑛𝑡 + 𝛿𝑋 + ε
𝑊𝑐ℎ𝑖𝑙𝑑 = 𝛼 + 𝛽2 𝑊𝑝𝑎𝑟𝑒𝑛𝑡 + 𝛾𝐵 + 𝛿𝑋 + 𝑢
𝐵 = 𝛼 + 𝛽3 𝑊𝑝𝑎𝑟𝑒𝑛𝑡 + 𝛿𝑋 + 𝑒
• Assuming that 𝑢 and 𝑒 are uncorrelated (𝐵 is random), we can
retrieve two effects from 𝑊𝑝𝑎𝑟𝑒𝑛𝑡 onto 𝑊𝑐ℎ𝑖𝑙𝑑:
– The direct (non-mediated) effect: 𝛽1
– The mediated effect, i.e., the role of inheritance: 𝛽3 ∙ 𝛾 = 𝛽1 − 𝛽2
• But are 𝑢 and 𝑒 uncorrelated?
– We allow for different variants, using SUR and mediate in Stata.
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7. Results: How persistence is personal wealth status?
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Rank Log IHS Rank Log IHS
Dep: 2nd Gen Dep: 2nd Gen
1st Gen 0.350*** 0.232* 0.210*** 1st Gen 0.364*** 0.105
(0.059) (0.010) (0.039) (0.009) (0.080)
728 728 728 165 256
Dep: 3rd Gen Dep: 3rd Gen (mid-life W)
2nd Gen 0.321*** 0.237*** 0.369*** 2nd Gen 0.281*** 0.160*** 0.279***
(0.029) (0.037) (0.026) (0.052) (0.062) (0.007)
1485 1485 1485 556 556 556
Dep: 3rd Gen Dep: 3rd Gen (midlife)
1st Gen 0.284*** 0.201*** 0.326*** 1st Gen 0.147*** 0.164***
(0.005) (0.070) (0.069) (0.003) (0.064)
1485 1485 1485 1001 1472
Mid-life wealth Wealth at death (estates)

8. Results: Does wealth persistence differ across the
distribution?
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-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
P0-50 P50-75 P75-90 P75-100
Intergenerationalelasticity
Parent's wealth fractile
Global (OLS)
Spline

9. Results: What is the role of inheritance?
• Very preliminary: Seems to be a large effect of inheritance
– Mediated effect much more than half of the total effect
– Prel findings on inheritances of Gen3 suggest about 50%
– Results sensitive to attempts to control for timing of inheritance
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Only pos. Incl. zeros
Dep: 2nd Gen
1st Gen 0.325 0.357*
(0.177) (0.179)
Dep: 2nd Gen
1st Gen 0.051 0.067
(0.134) (0.134)
Inheritance (B) 0.889*** 0.894***
(0.155) (0.147)
Dep: Inheritance
1st Gen 0.308*** 0.324***
(0.090) (0.091)
Mediated effect 0.274 0.290
(0.009) (0.009)

10. Concluding remarks
Three main conclusions (so far):
1. Personal wealth status persists for more than two generations
– Not only parents’ wealth, but also grandparents’ wealth matter
2. Inheritance, i.e., direct transfer of capital to descendents,
seems to account for much of this wealth persistence
– Our preliminary estimates suggest that they are quite large
3. At what point in life when wealth is measured matters less
– Persistence effetcs are similar when using wealth during midlife and
wealth at death
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