Wednesday, July 02, 2014

Inherited Wealth and Inequality

Mankiw's article in the NY times,

When a family saves for future generations, it provides resources to finance capital investments, like the start-up of new businesses and the expansion of old ones. Greater capital, in turn, affects the earnings of both existing capital and workers.

Because capital is subject to diminishing returns, an increase in its supply causes each unit of capital to earn less. And because increased capital raises labor productivity, workers enjoy higher wages. In other words, by saving rather than spending, those who leave an estate to their heirs induce an unintended redistribution of income from other owners of capital toward workers.

The bottom line is that inherited wealth is not an economic threat. Those who have earned extraordinary incomes naturally want to share their good fortune with their descendants. Those of us not lucky enough to be born into one of these families benefit as well, as their accumulation of capital raises our productivity, wages and living standards.

Why do (does Prof.Mankiw think) parents leave bequests to their children?

(1) Inter-generational Altruism
(2)Consumption Smoothing
(3)Regression toward the Mean

There's no strategic bequest motive.

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