The Relative Impact of Inheritance and other Factors on Economic Inequality

Abstract

An empirically grounded micro-simulation of saving, with bequests related negatively either in total to average children's income or separately to individual children's incomes, is constructed for a single generation in a steady growth economy. Behavioral parameters are set so that predicted bequests to the next generation are consistent with both the scale and assignment of inheritances (taken from a real-world source) for the simulation generation. The relative impact of inheritance and other factors on different aspects of economic inequality is assessed. While inheritance is a major cause of wealth inequality, its influence on annual income and lifetime resources is small, and in the latter case ambiguous. … Inheritance perpetuates and may intensify inequalities arising originally from other causes. In that sense, it is a secondary cause of inequality; but that is not, of course, to say that it is of secondary importance. The extent of its influence on distribution remains an open question, which cannot be decided merely by theoretical reasoning … but requires in addition something in the nature of a quantitative analysis of the relevant facts. -Wedgwood, 1929, pp. 60–61.