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VAM-Velferd, arbeid og migrasjon

Wealth Inequality Between and Within Generations

Alternative title: Formuesulikhet mellom og innen generasjoner

Awarded: NOK 3.6 mill.

Project Number:

236921

Application Type:

Project Period:

2014 - 2017

Funding received from:

Location:

Lately, both the public as well as academic debates about economic inequality has increased substantially. Increasing inequality has not only garnered attention in Norway and Europe but maybe particularly in the US. However, the access to good data has been a major challenge for both describing and understanding developments in wealth inequality. The project seeks to contribute to both how to measure wealth inequality, but also to understand its developments over time. Norway is one of the few countries in the world where both income and wealth are measured with a high degree of accuracy for the entire population over a long period of time. This is because Norway levies both a wealth and an income tax, and because reporting to the Tax Administration is largely done electronically and by third parties (employers, banks, etc.). In the US, for instance, only income is measured in this way at the individual level. In the first paper of the project, we verify the use of the capitalization method implemented by Saez and Zucman (2016). They document marked upward trends in wealth concentration. Since the US lack data on individuals' wealth but has data on individual incomes, they use this information, combined with aggregate data from the Flow of Funds to obtain estimates of the wealth of the US population. We use data on tax returns and actual wealth holdings from tax records for the whole Norwegian population to test the robustness of the methodology. We document that measures of wealth based on the capitalization approach can lead to misleading conclusions about the level and the dynamics of wealth inequality if returns are heterogeneous and even moderately correlated with wealth itself. Strong intergenerational correlations in wealth have fuelled a longstanding debate over why children of wealthy parents tend to be well off themselves. In a second paper of the project, we investigate the role of family background in determining children's wealth accumulation and investor behaviour as adults. Our research design allows us to credibly control for genetic differences in abilities and preferences and to identify the effects of exogenous changes in specific dimensions of family background. The analysis is made possible by linking Korean-born children who were adopted at infancy by Norwegian parents to a population panel data set with detailed information on disaggregated wealth portfolios and socio-economic characteristics. The mechanism by which these Korean-Norwegian adoptees were assigned to adoptive families is known and effectively random. We use the quasi-random assignment to estimate the causal effects from an adoptee being raised in one type of family versus another. Our findings show that family background matters significantly for children's accumulation of wealth and investor behaviour as adults, even when removing the genetic connection between children and the parents raising them. In particular, adoptees raised by wealthy parents are more likely to be well off themselves, whereas adoptees? stock market participation and portfolio risk are increasing in the financial risk-taking of their adoptive parents. These intergenerational causal links are not driven primarily by inter vivos transfers or bequests. The detailed nature of our data allows us to explore other mechanisms, assess the generalizability of the lessons from adoptees, and compare our findings to results from behavioural genetics decompositions. A third article studies how households invest their wealth over the life cycle. In a society where saving to one's own pension becomes more important, participation and investment in stock markets is an important source to inequality in retirement, as those that persistently took risk during their life will be better off at retirement. We find that households gradually readjust their wealth from risky to safe assets as they age, consistent with a simple model of life cycle consumption and savings choices. A fourth article relates to another source of inequality, entrepreneurship. Here we are studying how richer entrepreneurs both pin up larger companies and that entrepreneurs with a higher degree of buffer also do better. If only rich households are able to start their own successful businesses, this will relatively quickly help to increase inequality, for example, by children of wealthier parents, to a greater extent have the opportunity to start their own successful business. Project homepage: https://sites.google.com/site/vamwealthinequality/

The social security system provides insurance against individual shocks to income and health for which insurance through private markets is unavailable due to the usual adverse selection and moral hazard problems. Tax and social security systems redistrib ute income, both over a person's life cycle and between persons at the same point of the life cycle. One example of such mechanism is the estate(inheritance) tax. The extended family (the dynasty) may provide informal insurance by reallocating resources a cross families of the same dynasty. These transfers typically flow from the elderly to the younger family members (precisely the opposite of how pay-as-you-go public pension systems typically work). Family insurance may be more efficient than social insur ance since families have more precise information about needs, but may also lead to more inequality between families. We propose to study these family insurance mechanisms in detail, by exploring some new transmission channels (so far not studied in the literature) as well as revisiting some important questions. In the first project we will study the impact of children's shocks to income on the wealth accumulation of parents and on inter vivos transfers from parents to kids. In a second research effort w e study intergenerational persistence in returns on wealth. We propose this as a main driver in explaining intergenerational inequalities in wealth and in particular the skewed distribution of wealth observed in the data. Lastly, we tackle another import ant issue when we assess how individuals and households are adapting to a major policy reform, the abolishment of the Norwegian estate tax in 2014. The analysis will rely on Norwegian administrative data, which with its quality and depth satisfies all th e necessary requirements to perform the analysis. The outcomes from the analyses will all serve as important input in deriving optimal policy recommendations for the assessment and reform of the welfare state.

Publications from Cristin

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Funding scheme:

VAM-Velferd, arbeid og migrasjon