Wealth Accumulation in the US : Do Inheritances and Bequests Play a Significant Role?

Two of the most basic frameworks which economists use for analyzing national saving and private wealth accumulation are the life-cycle model (e.g., Modigliani [1986]) and the so-called altruistic or dynastic model (e.g., Barro [1974] and Becker [1974]). In the first, households care about their own lives. Since concave utility functions lead them to desire a relatively level time path of consumption, they save during high income years, as in middle age, in order to be able to maintain their standard of living through dissaving in periods of lower income, as during retirement. In the second model, households care about their descendants as well as themselves, and thus they build and exhaust estates and inheritances to smooth their dynasties' consumption paths over many generations. The difference between the two models is of more than pedagogical interest since they can produce strongly contrasting policy implications. In particular, a generous (and unfunded) social security system and/or a large national debt tend to displace private wealth accumulation in a life- cycle framework, raising interest rates and reducing an economy's physical capital stock (or increasing its reliance on financial inflows from abroad). In the simplest dynastic model, on the other hand, these effects are totally absent (e.g., Barro [1974]). The purpose of this paper is to formulate a model nesting both life-cycle saving and intentional bequests, and then to attempt to evaluate, with a calibration, the importance of each motive for saving, and the implications for policy analysis