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Understanding Inheritance Flow: A U-Shaped Analysis of Wealth Distribution and Mortality

This document explores the dynamics of inheritance flow, characterized by a U-shaped pattern, influenced by key factors such as aggregate wealth/income ratio, mortality rates, and the relationship between the wealth of decedents and the living population. It references notable studies highlighting the share of inheritance in total U.S. wealth, presenting three major challenges in understanding these dynamics. The findings suggest a redefinition of inheritance share metrics, considering changes in wealth accumulation trends over decades and the limitations of existing data.

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Understanding Inheritance Flow: A U-Shaped Analysis of Wealth Distribution and Mortality

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  1. Supplementary graphs & material (not shown during lecture)

  2. Computing inheritance flow Bt/Yt = µt mt Wt/Yt ▪ Wt/Yt = aggregate wealth/income ratio ▪ mt = aggregate mortality rate ▪ µt = ratio between average wealth of decedents and average wealth of the living (= age-wealth profile) → The U-shaped pattern of inheritance is the product of three U-shaped effects

  3. Application to the share of inheritance in total wealth • Modigliani AER 1986, JEP 1988: inheritance = 20% of total U.S. wealth • Kotlikoff-Summers JPE 1981, JEP 1988: inheritance = 80% of total U.S. wealth • Three problems: - Bad data • We do not live in a stationary world: life-cycle wealth was much more important in the 1950s-1970s than it is today • We do not live in a representative-agent world → new definition of inheritance share

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