Understanding the Relationship Between Parent and Child Wealth Research by Erik Hurst
The similar economic position of parents and children is partly
determined by how well parents teach their children to save.
Wealthy parents tend to have wealthy children. What accounts
for this similarity? Is it because wealthy parents invest in
their children's education, give their children financial gifts,
or pass on similar savings behavior?
Erik Hurst, an assistant professor at the University of Chicago
Graduate School of Business, and Kerwin Kofi Charles of the
University of Michigan address the complex issue of parent-child
wealth in their new study, "The Correlation of Wealth Across
Hurst and Charles use survey data that track a wide range of
parent-child pairs over 30 years. They find that standard measures
of household wealth such as income, human capital, and ownership
of particular assets show very similar results for parents and
children. Much of this persistence in wealth comes from the
high and low end of the income distribution: children of very
low wealth or very high wealth parents rarely end up in a substantially
different economic position.
However, there is still a considerable amount of economic mobility
within this range, and children are not necessarily bound by
their parents' lot in life.
What explains the similarity in parent-child wealth? Income
and portfolio composition account for the majority of the connection.
Hurst and Charles suggest that savings behavior, as measured
by the tendency for parents and children to own similar assets,
is also an important part of the explanation. Children's economic
choices may be shaped by their parent's savings tendencies,
either through direct learning or simply by being in the same
After controlling for parent and child income, Hurst and Charles
found that education, past financial gifts, and expected future
bequests play relatively insignificant roles in determining
the connection between parent-child wealth. The modest effect
of education is particularly noteworthy because it is commonly
assumed that wealthy parents beget wealthy children primarily
by financing their schooling. The study argues that if the transmission
of education is important in explaining the similarity in wealth
across generations, it can be seen in the child's income.
"Education is not the only thing you can give your child,"
says Hurst. "Informal discussions about savings over the
dinner table can also have an impact. While education is important
for your career path, you could easily earn a high income and
then spend it all on trips to Las Vegas."
Hurst and Charles use data from the Panel Study of Income Dynamics,
a national survey started in 1968 which tracks social and economic
variables of a given family over time. For each year of the
survey, households answer questions about their age, race, family
composition and education levels, and provide detailed information
about their labor market participation and income.
Children of the core sample respondents become part of the
survey as they leave their parents' household and form their
own. The authors look at families with children between ages
25 and 65 in the 1999 survey, and parents who were part of the
survey in 1984, 1989, and 1999. In total, Hurst and Charles
studied 1,491 parent-child pairs to compare the economic decisions
of parents to the economic decisions of their children.
The authors measure parent-child wealth before the giving of
bequests. By looking at the pre-bequest relationship, the authors
can explore why parents and children have similar wealth for
the majority of their lives.
After adjusting for age, the authors find an intergenerational
wealth elasticity of 0.37, implying that parents whose wealth
is 10 percent above average in the parents' generation have
children whose wealth is 3.7 percent above average in the children's
generation. An elasticity of 1 would mean that parental wealth
was the sole determinant of child wealth. An elasticity of 0
would mean that parents have no effect on child wealth. An elasticity
measure between 0 and 1 indicates how mobile a society is across
"The probability of being like your parents is much greater
than being dramatically different from them," says Hurst.
"But there is still a fair amount of mobility in society
depending on your perspective. It is a half full/half empty
scenario with many exceptions to the rule."
More than one-third of parents in the lowest wealth quintile
have children whose wealth places them in the three highest
quintiles in the child group. Seven percent of children whose
parents were in the lowest wealth quintile make it to the top
quintile. Comparable to the low end of the distribution, 11
percent of the children of high wealth parents fall to the lowest
quintile. However, it is also the case that almost 70 percent
of high wealth parents have children whose wealth places them
in the top two quintiles.
Learning to Save
Parents and children tend to generate very similar income flows
during their lives, with income accounting for half of the connection
between parent and child wealth. Wealth, though, is dependent
not only on income, but how much of that is saved.
The authors employ a commonly used method to determine savings
behavior-measuring household asset composition, and therefore
preferences, as an indicator of household savings tendencies.
They find the correlation between parent and child income also
carries over to similar savings rates. Having a parent who owns
stocks, a business, or a home makes a child much more likely
to hold the same asset.
Thirty-six percent of the intergenerational wealth elasticity
can be attributed to tendencies among parents and children to
hold similar assets. This tendency is, apart from income, the
next most important reason why wealth tends to be similar across
In general, the fact that a parent owns an asset is enough
to predict that the child will as well, most likely because
of parental example. Parents and children may therefore have
similar wealth because of similar tendencies to save out of
any given income stream.
Links to Welfare
In documenting how children may learn from the savings behavior
of their parents, the authors present evidence of an important
social phenomenon-people respond to education about finances.
This finding has larger policy implications for issues of welfare
and inner city development, especially in regards to stimulating
the savings of low-income households.
"If people can learn to save, the question for policymakers
then becomes whether these findings can be turned into an actual
policy program," says Hurst. "People need to learn
how to manage the money they receive. Requiring financial literacy
courses with the receipt of welfare payments may improve the
long-term economic position of low-income households."
Erik Hurst is assistant professor of economics at the University
of Chicago Graduate School of Business.