Wealth inequality has been persistently increasing over the last four decades. Emphasised by the publication of Capital in the Twenty-First Century (Piketty 2014), this fact has reignited academic and public interest in understanding how and why wealth is transmitted across generations (for examples, see VoxEU columns by Zuchman and Saez 2014, Kopczuk et al. 2016a and 2016b, Lindahl et al. 2016, Majlesi et al. 2019, Van Ker et al. 2020). Parent and child wealth could be positively correlated because of selection: if they share pre-determined correlated characteristics, such as cognitive ability, that drive wealth accumulation for both groups. Alternatively, parental wealth could influence the actions of parents in ways that encourage wealth accumulation among their children when they too are adults. Understanding the relative importance of selection versus causation in the intergenerational correlation of wealth is important for crafting policies to support wealth accumulation across generations. Only if the relationship is causal will policies to support higher wealth among parents lead to higher wealth among their children in the long run.
In our paper (Daysal et al. 2023), we use Danish administrative data on the entire population, leveraging variations in parental housing wealth driven by home price changes in different areas and at different ages of children to isolate the causal impact of parental housing wealth on children’s long-run wealth in adulthood. Our ability to study the effects of changes in parental housing wealth that occur in distinct periods of childhood is a novel feature of our study. Specifically, we examine how changes in parental housing wealth during early childhood (ages 0¬–5), middle childhood (ages 6–11), and the teenage years (ages 12–17) impact children’s overall wealth, housing wealth, and non-housing wealth at ages 29–33.
The importance of housing wealth in society
Our focus on parental housing wealth is motivated by the relative importance of this specific type of wealth compared to others. First, housing wealth is the most important component of wealth for all but the wealthiest households. Our former work documents that housing wealth is far more evenly distributed across the population than other forms of non-retirement wealth (Daysal et al. 2022). Second, housing wealth is relatively liquid: households extract between 20–25% of home equity increases to fund current expenditures (Mian and Sufi 2011, De Stefani and Hviid 2018). Finally, there have been large increases in the volatility and liquidity of housing wealth in recent decades from the housing boom and bust. Understanding the intergenerational implications of this variation is of high interest.
Parental housing wealth and child wealth are positively correlated
Following an extensive body of research documenting positive associations between parent and child wealth (Charles and Hurst 2003, Arrondel and Grange 2006, Clark and Cummins 2015, Fagereng et al. 2021, Adermon et al. 2018, Boserup et al. 2018, Black et al. 2020), we first estimate the correlation between parental housing wealth at the beginning of each childhood period and children’s wealth at ages 29–33. Parental housing wealth is strongly correlated with their children’s total wealth: 0.63 at birth, 0.74 at age 6, and 0.51 at age 12. We find that the correlation between the housing wealth of parents and their children increases across the stages of childhood, while the relationship weakens for the children’s non-housing wealth. In contrast, the association between a child’s wealth in early adulthood and parental housing wealth when the child becomes an adult is much weaker across all measures of the child’s wealth, suggesting a causal role of parental wealth during childhood in generating the long-run wealth outcomes of their children.
Changes in parental housing wealth affect child wealth, but timing matters
To uncover the causal impact of parental housing wealth on their children’s wealth in adulthood, we focus on children whose parents owned a single residential property at the time of the child’s birth. One concern that arises in our approach is that parents may move to larger houses, which is a decision that may be correlated with other factors that influence long-run wealth outcomes. To address this problem, we use price changes of the home at the time of the child’s birth as our main source of variation. Because homeowners obtain all the wealth from a home price increase, this method isolates the role of housing wealth changes per se rather than correlated characteristics of parents and children. The register data also allow us to control for a rich set of parent and child characteristics, such as baseline parental (housing and non-housing) wealth, municipality of birth, and parental background (e.g. income and education). These controls help alleviate the concern that higher SES parents purchase homes in areas that experience higher home price growth.
Our results suggest a causal role for parental housing wealth changes occurring during early (aged 0–5) and middle childhood (aged 6–11) but not in the teen years (12–17). We find that 27.2% and 25.3% of each Danish krone increase in parental housing wealth during early- and middle-childhood is passed on to children in the form of higher wealth in adulthood, respectively. We also document interesting differences in the importance of the timing of parental housing wealth shocks in the formation of adult children’s housing and non-housing wealth. We show that parental housing wealth gains during early childhood are transmitted only to children’s housing wealth, with 24.7% of each Danish krone of parental housing wealth gain during early childhood transmitted to the child’s housing wealth at ages 29–33. In contrast, the effects of parental housing wealth gains during middle childhood affect both housing and non-housing wealth accumulation: transmission to housing wealth is 15.2% and transmission to non-housing wealth is 10.1%.
Figure 1 Parental housing wealth and child wealth in adulthood: Intergenerational correlations versus causal effects
Why does parental housing wealth impact adult children’s wealth accumulation?
We argue that the effects could be driven by five potential mechanisms: the direct effects of wealth (i.e. transfers); the effects on asset allocation (other wealth); increased child educational attainment; changes to child labour market earnings; and changes to unobserved parental behaviours and household factors that shape children’s saving and investment behaviour. Due to data constraints, we are unable to directly examine the effects of the first two channels, but in line with prior research we argue that there is little scope for them to drive the transmission effects in our setting (Kolodziejczyk and Leth-Petersen 2013). Additionally, we show that while changes in parental housing wealth during youth affect educational attainment and earnings in adulthood, these two mechanisms explain at most 20–30% of the intergenerational transmission effects. We thus attribute the large unexplained portion of the transmission rates to changes in the unobserved household environment and parental behaviours that are passed down to children and influence their savings propensity and investment behaviour. These household factors act as within-household public goods, meaning that they are both non-rival (their impact on one child in the household does not exclude their impact on other children in the household) and non-excludable (all children in the household are exposed to them). Consistent with this interpretation, we find that effects change little with the number of children in the household. This would not be the case if the main mechanisms required direct expenditures by parents on children.
Filling an important gap in the existing literature
Our work contributes to several strands of the literature in economics. First, we add to prior studies examining wealth correlations across generations. The magnitudes of correlations between parental housing wealth and child wealth that we estimate align with prior estimates of the intergenerational transmission of net wealth (Charles and Hurst 2003, Boserup et al. 2018, Black et al. 2020), the intergenerational transmission of equity market participation (Black et al. 2017), and the intergenerational transmission of debt default (Kreiner et al. 2020).
Second, we add to previous research on the role of selection versus causation in driving these correlations, which primarily studied adoptees (Black et al. 2017, Black et al. 2020, Fagereng et al. 2021). Our causal impacts of changes in parental housing wealth, based on variation in the price of one’s home at birth, are arguably easier to generalise to the broader population. We also are the first to investigate the relative impact of parental wealth changes that occur in different periods of childhood. In addition, our results speak to how wealth shocks experienced in childhood are mediated by changes to the household environment that are then passed down.
Third, we contribute an extensive body of empirical research highlighting the role of early childhood environments in long-run socio-economic outcomes (e.g. Currie and Almond 2011, Almond et al. 2018). Our finding of a significant role for parental wealth changes during middle childhood also speaks to an emerging literature that emphasises opportunities for high-return investments in children beyond the early childhood period (e.g. Hendren and Sprung-Keyser 2020).
Finally, we add to a handful of papers emphasising the importance of household environment and parental behaviours in shaping child saving and investment behaviour (Fagereng at al. 2021, Boserup et al. 2018, Kreiner et al. 2020). These studies demonstrated the importance of the household environment but not how wealth shocks can change that environment in ways that are passed down to children and impact their long-run outcomes. Our research provides the first such evidence in the literature.
Rising wealth inequalities and the road ahead
Given persistently high intergenerational wealth correlations, understanding how and why wealth is transmitted across generations is increasingly important. Our results suggest that policies supporting wealth accumulation (and more specifically, housing wealth accumulation) among parents when their children are young would lead to higher wealth accumulation of those children when they reach young adulthood, thereby reducing wealth inequality.
Authors’ note: Any opinions and conclusions expressed herein are those of the authors and do not reflect the views of the U.S. Census Bureau.
References
Adermon, A, M Lindahl and D Waldenström (2018), “Intergenerational Wealth Mobility and the Role of Inheritance: Evidence from Multiple Generations”, The Economic Journal 128(612): F482–F513.
Almond, D, J Currie and V Duque (2018), “Childhood Circumstances and Adult Outcomes: Act II”, Journal of Economic Literature 56(4): 1360–446.
Black, S E, P J Devereux, P Lundborg and K Majlesi (2020), “Poor Little Rich Kids? The Role of Nature versus Nurture in Wealth and Other Economic Outcomes and Behaviours”, Review of Economic Studies 87(4): 1683–725.
Black, S E, P J Devereux, P Lundborg and K Majlesi (2017) “On the Origins of Risk-taking in Financial Markets”, The Journal of Finance 72(5): 2229–78.
Boserup, S H, W Kopczuk and C T Kreiner (2018), “Born with a Silver Spoon? Danish Evidence on Wealth Inequality in Childhood”, The Economic Journal 128(612): F514–F544.
Charles, K K and E Hurst (2003), “The Correlation of Wealth Across Generations”, Journal of Political Economy 111(6): 1155–82.
Clark, G and N Cummins (2015), “Intergenerational Wealth Mobility in England, 1858–2012: Surnames and Social Mobility”, The Economic Journal 125(582): 61–85.
Currie, J and D Almond (2011), “Human capital development before age five,” Handbook of Labor Economics, vol. 4, Elsevier, 1315–486.
Daysal, N M, M F Lovenheim and D N Wasser (2022), “The Correlation of Net and Gross Wealth across Generations: The Role of Parent Income and Child Age”, AEA Papers and Proceedings 112: 73–77.
Daysal, N M, M F Lovenheim and D N Wasser (2023), “The Intergenerational Transmission of Housing Wealth”, NBER Working Paper no. 31669.
De Stefani, A and S J Hviid (2018), “Housing Collateral and Home-equity Extraction”, Danmarks Nationalbank Working Paper no. 135, 20 February.
Fagereng, A, M Mogstad and M Rønning (2021), “Why Do Wealthy Parents have Wealthy Children?”, Journal of Political Economy 129(3): 703–56.
Hendren, N and B Sprung-Keyser (2020), “A Unified Welfare Analysis of Government Policies”, Quarterly Journal of Economics 135(3): 1209–318.
Kolodziejczyk, C and S Leth‐Petersen (2013), “Do First‐Time House Buyers Receive Financial Transfers from Their Parents?”, The Scandinavian Journal of Economics 115(4): 1020–45.
Kopczuk, W, C T Kreiner and S Boserup (2016b), “Danish evidence on wealth inequality in childhood”, VoxEU.org, 4 November.
Kopczuk, W, C T Kreiner and S Boserup (2016a), “Bequests and wealth inequality: Evidence from Denmark”, VoxEU.org, 11 March.
Kreiner, C T, S Leth-Petersen and L C Willerslev-Olsen (2020), “Financial Trouble across Generations: Evidence from the Universe of Personal Loans in Denmark”, The Economic Journal 130(625): 233–62.
Lindahl, M, D Waldenstrom and A Adermon (2016), “Drivers of wealth persistence across generations”, VoxEU.org, 27 November.
Majlesi, K, P J Devereux, P Lundborg and S Black (2019), “The role of nature versus nurture in wealth and other economic outcomes and behaviour”, VoxEU.org, 16 May.
Mian, A and A Sufi (2011), “House Prices, Home Equity-based Borrowing, and the US Household Leverage Crisis”, American Economic Review 101(5): 2132–56.
Piketty, T (2014), Capital in the Twenty-First Century, Harvard University Press.
Van Ker, P, B Nolan, J C Palomino and S Morelli (2020), “The intergenerational transmission of wealth in rich countries”, VoxEU.org, 19 September.
Zuchmann, G and E Saez (2014), “Exploding wealth inequality in the United States”, VoxEU.org, 28 October.
