How Does Wealth Beget Wealth? Evidence from Sweden

By , and ·August 4, 2020
Columbia University, University College, Dublin and Lund University

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The Issue:

Wealthy parents tend to raise children who grow up to be wealthy, just as children whose parents have few assets are likely to possess little wealth in adulthood. However, little is known about the extent to which this relationship is determined genetically, by environmental factors, or by some combination of both. Looking at data from Sweden on the wealth of adopted children, their biological parents, and their adoptive parents, we find that — even before any inheritance — there is a substantial role for environmental factors and a much smaller role for pre-birth factors in explaining wealth outcomes. As many countries, including the U.S., experience growing wealth inequality, a better appreciation of the ways in which wealth is transferred across generations is crucial to inform policies to reduce inequality.

As many countries experience growing wealth inequality, a better appreciation of the ways in which wealth is transferred across generations is crucial to inform policies to reduce inequality.

The Facts:

  • Wealth inequality in the U.S. has increased in recent decades. A Pew Research Centre study found that the median net worth of upper-income families in the U.S. doubled between 1983 and 2013, but declined for lower-income families. Additionally, in 1989, the richest 5% of families in the U.S. had 114 times as much wealth as families at the 20th-40th percentile of the wealth spectrum. By 2016, the top 5% held 248 times as much wealth as that group.
  • While income mobility has been the focus of a lot of recent research, much less is known about the mechanisms surrounding the transmission of wealth across generations, even though wealth may be a better measure of economic success than income. Wealth directly influences consumption and investment possibilities, and greater wealth enables parents to invest more in their children’s futures. Importantly, wealth is also much less equally distributed compared to education and income. And considering wealth is strongly correlated across generations, it can have a persistent negative impact on socio-economic mobility over the long-term.
  • Wealth could be correlated across generations through multiple pathways. One possible pathway is through biology; that is, the genetic inheritance of skills, attitudes, and preferences that are associated with higher wealth in each generation. This channel suggests that intergenerational correlations arise because children from wealthy families are inherently more talented and would be wealthier than others regardless of inheritances, or the advantages of growing up with wealthier parents. Another pathway is environmental. Wealthier parents may invest more in their children’s education, help them get better jobs, provide funding for business startups, give financial gifts, or influence child preferences or attitudes towards savings and investments. This channel suggests that wealth correlations arise through opportunities provided by the environment the child grows up in, and any child given these opportunities would benefit. Additionally, biological and environmental pathways may interact, and the impact of environmental factors may differ depending on a child’s biological endowments. 
  • The nature–nurture distinction is of considerable importance, as policies to address high levels of wealth inequality rely on an understanding of its underlying causes. However, it is difficult to distinguish between nature and nurture because most children are raised by their biological parents. We disentangle the role of nature and nurture in the transmission of wealth across generations using data from a unique Swedish register that identifies both biological and adoptive parents of adopted children. We use information on over 1.2 million children raised by their biological parents and nearly 2,600 adopted children for whom we have data available for both biological and adoptive mothers and fathers. We focus primarily on pre-inheritance wealth. Since children are likely to be well into middle age when they receive bequests, pre-inheritance wealth of children may better reflect their wealth for most of their lives.
  • Using the same data and methodology, our research also allows us to assess the relative impact of nature and nurture on a range of characteristics correlated with wealth (see chart). The factors that are above the diagonal line are more strongly influenced by the environment, while those below are more strongly influenced by biology; those on the line are influenced equally by biological and adoptive parents. Wealth, income, and attitudes towards investment and savings of adoptive children appear more closely related to those of their adoptive parents than to their biological parents. In contrast, the educational attainment of biological parents seems to have a greater influence on the educational attainment of the children. The relatively weak relationship between biological parental wealth and adoptive child wealth suggests that intergenerational transmission of wealth is not mainly because children from wealthier families are inherently more talented. Instead, it appears that, even in a relatively egalitarian society like Sweden, wealth begets wealth.

What this Means:

Our research highlights that children with wealthy parents benefit not just from good genetics but, more importantly, from growing up with more advantages. This is true in a relatively egalitarian society with a strong social safety net, suggesting a likely larger role for the environment in less equal societies such as the United States. As wealth and consumption become more unequally distributed, children from poorer families have fewer opportunities relative to children from wealthier families, suggesting an important role for policy to equalize opportunities and to mitigate intergenerational disparities.

  • Editor's note: This post was co-written with EconoFact Associate Editor Kailash K. Prasad based on "Poor Little Rich Kids? The Role of Nature versus Nurture in Wealth and Other Economic Outcomes and Behaviors" by Sandra E. Black, Paul J. Devereux, Petter Lundborg, and Kaveh Majlesi: The Review of Economic Studies, Volume 87, Issue 4, July 2020, Pages 1683-1725.

  • Topics:

    Inequality / Wealth
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