Monday, June 23, 2014
Some financial experts say that inherited wealth is making a comeback. If capital owners save much of their income, their wealth will accumulate and will be passed onto heirs. The decision to leave bequests to children are often based on three principles:
- Intergenerational Altruism. Parents care about their children and future generations will care about their children. This is a concept known as “utility,” which depends not only on what happens during his own lifetime but on the circumstances he expects for his infinite stream of descendants.
- Consumption Smoothing. People get utility from consuming goods and services but “also exhibit diminishing marginal utility: the more you are already consuming, the less benefit you get from the next increase in consumption.” Thus, people save by drawing down assets.
- Regression Toward the Mean. This is the tendency of many variables to return to normal levels over time. According to a recent study, if your income is in the 98th percentile, your children will likely be in the 65th percentile. For those in the bottom half of the income distribution regression means their descendants will likely rank higher than they do.
See David Leonhardt, How Inherited Wealth Helps the Economy, The New York Times, June 21, 2014.
Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.