Rich People Problems: The Economics of Inheritance

Sigma
10 min readJun 21, 2023

1. What is Inheritance and what qualifies as one?

Inheritance refers to the process of passing on wealth or assets from one generation to another. The economics of inheritance is a branch of economics that focuses on how inheritance affects the distribution of wealth in a society and how it can impact economic outcomes.

One key concept in the economics of inheritance is intergenerational transfers, which refers to the transfer of wealth from one generation to another. This can take many forms, including bequests, gifts, and transfers.

In the same context, human versus nonhuman wealth refers to the distinction between the transfer of wealth or assets that are tied to individuals’ human capital, such as their education, skills, and abilities, versus the transfer of wealth or assets that are not tied to individuals’ human capital, such as physical property or financial assets.

Human wealth is often considered to be the most valuable form of wealth, as it is tied to individuals’ ability to generate income and contribute to the economy. Human wealth can be transferred through intergenerational transfers of knowledge, skills, and abilities, such as education and training, or through bequests of financial resources that can be used to fund educational or career opportunities.

Nonhuman wealth, on the other hand, includes assets such as real estate, stocks, bonds, and other financial instruments that are not tied to individuals’ human capital. Nonhuman wealth can be transferred through bequests or inter vivos transfers and can provide financial support and security to heirs or beneficiaries.

The transfer of human versus nonhuman wealth has important implications for economic outcomes and inequality. Inheritance of human capital can provide individuals with the skills and knowledge they need to succeed in the labor market and generate income.

2. Why study the Economics of Inheritance… and How?

Inheritance is a complex and controversial topic in economics. On the one hand, inheritance can provide a source of financial security for heirs and help to reduce inequality by redistributing wealth. On the other hand, it can perpetuate existing inequalities by concentrating wealth and power in the hands of a few families and create disincentives for work and productivity among heirs who may rely too heavily on inherited wealth. In recent years, researchers have used population registers to study the impact of inheritance on wealth inequality, shedding new light on this important and contentious issue.

Population registers are large databases that record demographic information on entire populations over time. They are particularly useful for studying inheritance because they allow researchers to track the transmission of wealth across generations and to control for a wide range of factors that might confound the analysis. By linking information on parents and children, researchers can study the extent to which inheritance contributes to wealth inequality over time and across different populations.

One key finding from population register studies is that inheritance is a major driver of wealth inequality. In a 2017 study in Sweden, for example, researchers found that inherited wealth accounted for about 30% of total household wealth in 2007 and that the top 10% of households by wealth received about 60% of all inheritances. The researchers also found that inherited wealth had become more important over time, with the share of household wealth accounted for by inheritance increasing from 20% in 1989 to 30% in 2007.

Another important finding from population register studies is that the transmission of wealth across generations is highly unequal. In a 2021 study of Norway, for example, researchers found that the top 1% of families accounted for about 25% of total inherited wealth, while the bottom 50% of families received only about 10% of inherited wealth. The economics of inheritance also considers the role of inheritance in shaping economic mobility and social mobility. Inheritance can provide a leg up for those born into wealthy families, while those from less privileged backgrounds may face greater challenges in accumulating wealth and achieving economic success.

In addition, inheritance can have important implications for tax policy and government revenue. Governments may seek to tax inherited wealth to redistribute wealth and promote greater economic equality, although the effectiveness and desirability of such policies are a matter of ongoing debate.

In addition to shedding new light on the relationship between inheritance and wealth inequality, population register studies have also helped to challenge some longstanding assumptions about the role of inheritance in the economy. One such assumption is that inheritance is an important source of capital for entrepreneurship and innovation. In reality, however, inherited wealth is often used to fund consumption and other non-productive activities, rather than to invest in new businesses or technologies.

This has important implications for economic growth and innovation. If inherited wealth is not being used to fund new ventures, then it may be depriving the economy of needed investment and stunting innovation. This suggests that policies aimed at promoting entrepreneurship and innovation may need to focus on other sources of capital, such as venture capital or public investment.

Another assumption that has been challenged by population register studies is that inheritance serves as a reward for hard work and productivity. In reality, however, inheritance is often determined by factors beyond the control of the individual, such as family background and luck. This suggests that inheritance may not be an efficient or fair way to allocate resources and that alternative mechanisms, such as merit-based rewards, may be more effective and equitable.

3. Inheritance as an Economic Factor

One important economic effect of inheritance is its impact on wealth inequality. Inherited wealth can account for a significant portion of total household wealth, particularly among the very wealthy. Studies have shown that the top 10% of households by wealth often receive the majority of all inheritances, leading to a greater concentration of wealth in the hands of a few families. This concentration of wealth can have important implications for economic opportunity, social mobility, and political power.

Inheritance can also have implications for economic productivity and growth. Some economists have argued that inheritance can serve as a source of capital for entrepreneurial ventures and other productive investments. However, as pointed out earlier that inherited wealth is often used to fund consumption and other non-productive activities, rather than being invested in new businesses or technologies. This suggests that the economic impact of inheritance may be more mixed than some proponents suggest.

In addition to its economic effects, inheritance also has important implications for public policy. In many countries, inheritance is subject to taxation, with the aim of promoting greater economic equality and raising government revenue. However, some argue that heavy taxes on inherited wealth could discourage savings and investment, while others argue that such policies are necessary to promote greater economic opportunity and reduce the concentration of wealth in the hands of a few families.

Inheritance also has implications for intergenerational transfers of human capital or the knowledge, skills, and abilities that people possess. Some studies have shown that children who inherit wealth or other assets from their parents may be more likely to achieve high levels of education and career success. This may be due in part to the financial resources that inheritance provides, which can help to fund educational opportunities and other investments in human capital.

However, inheritance can also create disincentives for work and productivity among heirs, who may rely too heavily on inherited wealth rather than pursuing their own careers and interests. This can have important implications for social mobility, as it may perpetuate existing inequalities and limit economic opportunities for those from less privileged backgrounds.

4. Rich People Problems: Inter Vivos Transfers versus Bequests

Inter vivos transfers refer to the transfer of assets or wealth from one person to another during the donor’s lifetime, while bequests refer to the transfer of assets or wealth from a deceased person’s estate to their heirs or beneficiaries through a will or trust.

There are several differences between these two types of transfers. Inter vivos transfers are generally voluntary and can be made for a variety of reasons, such as to provide financial support to family members or to avoid taxes. In contrast, bequests are typically made as part of an estate plan and are subject to legal requirements and regulations.

One key advantage of inter vivos transfers is that they can provide financial support to family members during the donor’s lifetime. This can help to ensure that family members have the resources they need to pursue educational or career opportunities or to address unexpected financial challenges. Inter vivos transfers can also provide tax benefits, as they may be subject to lower tax rates or exemptions.

In contrast, bequests provide a way for individuals to transfer assets or wealth to their heirs or beneficiaries after their death. Bequests are typically made as part of an estate plan and are subject to legal requirements and regulations, which can help to ensure that the transfer is executed according to the donor’s wishes. Bequests can also provide a way to support charitable causes or organizations, which can help to create a lasting legacy.

Ultimately, both methods have their challenges and risks. For example, Donors may face the risk of outliving their financial resources, which could create financial challenges later in life or the donor may not have a will or estate plan in place, their assets may be subject to probate and may not be distributed according to their wishes.

There can be conflicts among family members or other beneficiaries, particularly if the distribution is unequal or if there are disagreements about the donor’s intentions.

5. People Problems

Inherited wealth is often viewed with skepticism and criticism due to concerns over wealth concentration and economic inequality. However, it’s important to note that inherited wealth can also have a positive impact on the economy by providing a stable source of capital for entrepreneurs and small businesses and supporting philanthropy and charitable giving which can support a range of social and cultural initiatives.

It can also provide funding for education and training programs that can help to improve individuals’ skills and knowledge. Education and training are critical components of economic growth and development, as they provide individuals with the skills they need to succeed in the labor market and generate income. Inherited wealth can provide funding for scholarships, vocational training, and other educational initiatives that can help to promote economic opportunity and upward mobility.

However, it’s important to recognize that inherited wealth can also contribute to economic inequality and social exclusion. The concentration of wealth can create barriers to entry for individuals and businesses, limiting competition and innovation. It can also perpetuate existing inequalities, such as those based on race, gender, or social class, and limit economic opportunity for those who are not born into wealthy families.

Currently, the share of wealth held by People in different income ranges for different adult populations is given by the following:

According to the Credit Suisse Global Wealth Report 2021, the top 10 richest countries in the world based on average wealth per adult are:

i. Switzerland

ii. United States

iii. Australia

iv. Belgium

v. Norway

vi. Singapore

vii. France

viii. Japan

ix. United Kingdom

x. Netherlands

The report also provides information on the distribution of wealth within these countries, measured by the Gini coefficient, where a value of 0 represents perfect equality and a value of 1 represents perfect inequality. For example, if a country’s Gini coefficient is 0.7, it means that the top 10% of the population holds 60% of the country’s total wealth, and the bottom 50% of the population holds only 10% of the country’s total wealth.

Here are the Gini coefficients for each of the top 10 richest countries:

xi. Switzerland — 0.745

xii. United States — 0.786

xiii. Australia — 0.697

xiv. Belgium — 0.701

xv. Norway — 0.728

xvi. Singapore — 0.752

xvii. France — 0.669

xviii. Japan — 0.675

xix. United Kingdom — 0.720

xx. Netherlands — 0.708

These Gini coefficients indicate that wealth inequality is highest in the United States, followed by Switzerland and Singapore. France has the lowest level of wealth inequality among the top 10 richest countries.

According to a 2021 report by Oxfam, global wealth inequality has increased significantly over the past decade. The report notes that the top 1% of the world’s population currently holds twice as much wealth as the bottom 90% of the population combined.

Furthermore, according to a 2019 study by the Federal Reserve Bank of St. Louis, intergenerational wealth transfers account for a significant portion of wealth inequality. The study found that intergenerational transfers of wealth account for around 70% of the wealth inequality observed in the United States.

6. Progression?

It is well established by now that the concentration of wealth can create barriers to entry for individuals and businesses, limiting competition and innovation. It can also perpetuate existing inequalities, such as those based on race, gender, or social class, and limit economic opportunity for those who are not born into wealthy families.

To address these concerns, policymakers and economists have proposed a range of policies and initiatives that aim to promote greater economic opportunity and reduce wealth concentration. One approach is to implement progressive taxation, which would require individuals and families with higher levels of inherited wealth to contribute a larger share of their income or assets to support public goods and services. This can help to reduce wealth concentration and provide funding for initiatives that promote economic opportunity and mobility.

Another approach is to promote greater transparency and accountability in the transfer of wealth. For example, some countries have implemented inheritance or estate taxes that require individuals and families to disclose the value and distribution of their assets. This can help to promote greater awareness of wealth concentration and support efforts to address inequality and social exclusion.

Additionally, policymakers and economists have proposed initiatives that focus on the transfer of human capital, such as investments in education and training programs. By providing individuals with the skills and knowledge they need to succeed in the labor market and generate income, these initiatives can help to promote economic opportunity and mobility, regardless of individuals’ family backgrounds or inherited wealth.

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