Wealthy parents, wealthy kids? Exploring mechanisms of intergenerational wealth transmission in the UK
|Day:||Wed 3 Jul|
A major source of wealth inequality is persistence in wealth across generations. Recent evidence reveals strong associations between the wealth of parents and kids, but we don’t know enough about the mechanisms of wealth transmission across generations. While some argue direct financial transfers are the most important mechanism, others attach saving or investment behaviour a key role. Using a rich panel data from Understanding Society and British Household Panel Survey, we estimate intergenerational wealth correlations, and examine the relative importance of possible transmission mechanisms such as intervivos transfers, transmission of behaviour (housing, saving and investment), work-family trajectories in early adulthood, education and health. We focus on children’s outcomes in mid-life (pre-bequest period), and study home ownership and home value (as a proxy of wealth) separately. We explain almost half of the correlations through hypothesized mechanisms, and find that work-family trajectories are the most important transmission mechanism for home ownership, while investment in early adulthood is the most important transmission mechanism for home value. We also show the importance of controlling for other parental characteristics and identifying the sole wealth effect, especially while studying the transmission mechanisms for wealth accumulation.