Why Do Wealthy Parents Have Wealthy Children?

Abstract

Strong intergenerational associations in wealth have fueled a longstanding debate over why children of wealthy parents tend to be well off themselves. We investigate the role of family background in determining children’s wealth accumulation and investor behavior as adults. The analysis is made possible by linking Korean-born children who were adopted at infancy by Norwegian parents to a population panel data set with detailed information on disaggregated wealth portfolios and socio-economic characteristics. The mechanism by which these Korean-Norwegian adoptees were assigned to adoptive families is known and effectively random. We use the quasi-random assignment to estimate the causal effects from an adoptee being raised in one type of family versus another. Our findings show that family background matters significantly for children’s accumulation of wealth and investor behavior as adults, even when removing the genetic connection between children and the parents raising them. In particular, adoptees raised by wealthy parents are more likely to be well off themselves, whereas adoptees’ stock market participation and portfolio risk are increasing in the financial risk taking of their adoptive parents. The detailed nature of our data allows us to explore mechanisms, assess the generalizability of the lessons from adoptees, and compare our findings to results from behavioral genetics decompositions.

Keywords: intergenerational transmission; wealth; financial risk taking; family background

JEL Classification: D31, J62