Economic Growth and Wealth Inequality: The Role of Differential Fertility

Abstract

This paper provides a quantitative assessment of the impact of economic growth on wealth inequality. Using both aggregate and micro-level data, we document that a worsening of the economic outlook determines a fall in expected children income. As a consequence parents reduce fertility and increase the amount of intergenerational transfers. Wealthier households, who have ceteris paribus more offsprings, adjust their fertility decision by a greater magnitude. Therefore a persistent fall in economic growth causes an increase in wealth inequality in the subsequent generation. In order to rationalize this empirical evidence we solve the Barro- Becker model of fertility in a setup with aggregate and idiosyncratic shocks to labour income, and incomplete markets à la Bewley. We found that the slowdown in economic growth observed in the US between the 1950s and the 1970s can account for almost 40 per cent of the increase in wealth concentration since 1980s.

Keywords: Wealth Inequality, Fertility, Intergenerational Transfers, Hetereogeneous Agents

JEL Classification: D19, D31, D52, E71, J11, J13