The Correlation of Wealth Across Generations

This paper assesses the similarity in net worth between parents and their children, and explores alternative explanations for this similarity. Using a standard life cycle model, we show that, depending on the extent to which preferences for saving are correlated across generations, the relative magnitudes of the intergenerational wealth and income correlations are a priori indeterminate. We document substantial intergenerational persistence in wealth: the age adjusted correlation is between 0.23 and 0.50, similar in magnitude to the documented intergenerational income correlation. These intergenerational relationships are large, especially since we only focus on households who have not yet received bequests from their parents. Permanent income measures explain less than one-half of the raw intergenerational wealth correlation. Controlling for the receipt of large gifts, expected bequests and interfamily risk sharing explains a small amount of the remaining wealth correlation. Our model suggests that such a finding implies a sizeable intergenerational persistence in preferences for saving. We provide direct evidence for this claim. Using measures of preferences from the Panel Study of Income Dynamics, we show that the responses to survey questions designed to measure risk aversion are highly correlated between parents and their children. We thank Heidi Shierholz for excellent research assistance and participants at the NBER 2000 summer consumption workshop, the University of Chicago’s Graduate School of Business macro lunch, the University of Michigan’s labor seminar, Dartmouth’s economic workshop and Purdue University’s macro/international workshop for helpful comments. Additionally, we would like to thank Mark Aguiar, Orazio Attanasio, Rebecca Blank, John Bound, Charlie Brown, Steve Davis, Anil Kayshap, Kevin Lang, Glen Loury, Anna Lusardi, Casey Mulligan, Jonathan Skinner, Gary Solon and Nick Souleles. The Correlation of Wealth Across Generations