Friday, August 7, 2015

Inequality: The Important Role of Family and Inheritance

From the NBER (abstract):

Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth
Sandra E. Black, Paul J. Devereux, Petter Lundborg, Kaveh Majlesi

Wealth is highly correlated between parents and their children; however, little is known about the extent to which these relationships are genetic or determined by environmental factors. We use administrative data on the net wealth of a large sample of Swedish adoptees merged with similar information for their biological and adoptive parents. Comparing the relationship between the wealth of adopted and biological parents and that of the adopted child, we find that, even prior to any inheritance, there is a substantial role for environment and a much smaller role for genetics. We also examine the role played by bequests and find that, when they are taken into account, the role of adoptive parental wealth becomes much stronger. Our findings suggest that wealth transmission is not primarily because children from wealthier families are inherently more talented or more able but that, even in relatively egalitarian Sweden, wealth begets wealth.

Translation: It's nurture, not nature. If that's the case, meritocracy (in an aggregate sense) without some government intervention would be a sub-optimal growth and development strategy, even in a relatively equal society.

Technical Notes

Black, Sandra E., and Paul J. Devereux, Petter Lundborg, & Kaveh Majlesi, "Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth", NBER Working Paper No. 21409, July 2015


  1. Interesting.

    Now take a look at Forbes' list of tech billionaires.

    The top 10:

    1. Bill Gates (US$79.6 billion)
    2. Larry Ellison (US$50 billion)
    3. Jeff Bezos (US$47.8 billion)
    4. Mark Zuckerberg (US$41.2 billion)
    5. Larry Page (US$33.4 billion)
    6. Sergey Brin (US$32.8 billion)
    7. Jack Ma (US23.2 billion)
    8. Steve Ballmer (US$22.7 billion)
    9. Laurene Powell Jobs (US$21.4 billion)
    10. Michael Dell (US$19.4 billion)

    Meritocracy in play here? All of the above (with the exception of #9 Laurene Powell Jobs, the widow of Steve Jobs) are "self made" billionaires who rode the tech boom.

    Btw, the youngest in the Forbes' list of tech billionaires is Evan Spiegel (the founder of Snapchat), aged 25, who is worth an estimated US2.1 billion.

    1. @anon

      You're saying, in effect, that 10 data points can be generalised into a rule that describes the whole of society, and therefore should be the basis of social organisation.

      You might want to read this first, especially the second full article linked to.

    2. Well, yes.

      Are you disputing the fact that 9 out of the top 10 tech billionaires are "self made"? Or that they have somehow benefitted from "luck", inherited riches or an uneven playing field?

      Are you saying that, in the tech world at least, there is no such thing as "meritocracy" or that "fortune favours the brave"?

      Ask yourself why Malaysia has, up to now, not produced a tech billionaire?

      And if you are going on about the "whole of society", how can the "whole of society" be better served?

      Income and wealth "inequality" is here to stay, unless you are willing to overthrow the Darwinian concepts and free markets.

      Let's put it this way - no one is forcing people to use Microsoft or Android software, Facebook or anything in the Apple ecosystem.

      People still continue to do so. And thereby increase the wealth of the tech billionaires and millionaires.

      Show me one instance of successful income or wealth redistribution anywhere in the world - this even though volumes have been written about the pernicious effects of inequality.

    3. @anon

      You've totally missed the point.

      I don't want to give a lecture on statistical inference, so I'll try to keep this as simple as possible.

      1 .The US has a population close to 320 million. Taking a sample of 10 (no matter where they are in the income distribution) will not tell you what characteristics matter for success, because the sample is simply too small. Another way to look at it - take the Forbes list from 10 years ago, 20 years ago, and 30 years ago - the composition will be largely different. I would bet that 10 years and 20 years from now, it would also be different.

      A simple analogy for this would be the blind men describing an elephant parable.

      2. Taking the top 10 makes things worse, statistically speaking. There will always be outliers in any distribution, but what we want is information about what matters for the (statistical) population as a whole. Focusing on the top as saying something about the whole distribution is an example of survivorship bias. An infamous real world example of the failure of this sort of approach is the book In Search of Excellence. I'd actually class a lot of management theory books looking at company success in this category.

      To make statistically valid inferences about a set of characteristics, you have to examine a random, representative sample of the population who share those characteristics, not just those who succeeded. Taking the top ten list invalidates this very basic principle.

      Finally, you do realise that a majority of those on that list come from Ivy League (Stanford, Harvard, Princeton) or other top rated (Michigan, Chicago) universities. Enrollment in these universities is, ironically, actually highly correlated with family socio-economic status.

      Successful wealth and income distribution? Too numerous to name. Finland, Denmark, Sweden, Japan, Korea and many others. The US has affirmative action policies as well as an extensive menu of social assistance, while Singapore is actually more advanced than we are in terms of social cash transfers.

    4. it will also be best if you notice that 'self-made' is far from 'did not start off rich'. i'm uncertain about their biographies, but im quite sure the gates and the bezos are hugely wealthy families even before bill and jeff popped in.

      which is what the whole article was about.

      after all, you can have all the natural traits and talents as bill gates, but if you need to pull a rickshaw everyday to care for a sick mother you'll be worse off than the real bill gates whose rich parents not only put few demands on the fella but provided much support when he was starting out.

      unless everyone goes through life with the same set of circumstances (being born in the same way and having the same luck and opportunities), then meritocracy is just a system that rewards the lucky.