Genetic Endowments, Income Dynamics, and Wealth Accumulation Over the Lifecycle

74 Pages Posted: 15 Aug 2022 Last revised: 5 Jun 2023

See all articles by Daniel Barth

Daniel Barth

Board of Governors of the Federal Reserve System

Nicholas W. Papageorge

Johns Hopkins University Department of Economics

Kevin Thom

University of Wisconsin Milwaukee

Mateo Velasquez Giraldo

Johns Hopkins University, Department of Economics

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Date Written: August 2022

Abstract

A growing literature on gene-by-environment (G × E) interactions — much of it concerned with education and human capital — asks how policy and other environmental factors can affect inequality related to genetic factors. Economic models are typically absent from this literature, but could play a vital role in understanding how counterfactual reforms might interact with genetics to shape behavior, outcomes, and welfare. We estimate a life-cycle model of consumption and savings with portfolio decisions, allowing a measure of the genetic endowments that predict educational attainment to directly affect income, labor disutility, stock market participation costs, and returns to risky assets. Our estimates suggest that, even after accounting for completed education, childhood SES, and inheritances, genetic factors linked to educational attainment increase wealth both through life-cycle income profiles and through differences in rates of return on invested wealth. Counterfactual exercises predict how social security reforms would modify the genetic endowment-welfare gradient. Strikingly, some policies may simultaneously flatten gene-wealth gradients but increase gene-welfare inequality. Typical G × E analyses, lacking an optimizing framework, could fail to reveal this distinction. This highlights the value of economic theory in understanding the policy implications of G × E findings, particularly for counterfactual environments.

Suggested Citation

Barth, Daniel and Papageorge, Nicholas W. and Thom, Kevin and Velasquez Giraldo, Mateo, Genetic Endowments, Income Dynamics, and Wealth Accumulation Over the Lifecycle (August 2022). NBER Working Paper No. w30350, Available at SSRN: https://ssrn.com/abstract=4190172

Daniel Barth (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Nicholas W. Papageorge

Johns Hopkins University Department of Economics ( email )

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Kevin Thom

University of Wisconsin Milwaukee ( email )

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Milwaukee, WI 53201-0729
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Mateo Velasquez Giraldo

Johns Hopkins University, Department of Economics ( email )

Baltimore, MD 20036-1984
United States

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