How much does a family’s wealth determine a child’s financial prospects? Is Ivanka Trump a success because she inherited smarts and drive from her father, Donald Trump, or did her father’s success give her a leg up?
Of course, no one completely denies the impact of affluent upbringing on a child’s educational and financial prospects. But the far more important question is: by how much does an affluent upbringing influence a child financial and educational prospects?
In his infamous essay, Defending the One Percent, Gerg Mankiw links the correlation between people’s earnings with those of their parents to genetic factors. “parents and children share genes” Mankiw noticed ” a fact that would lead to intergenerational persistence in income even in a world of equal opportunities. Smart parents are more likely to have smart children, and their greater intelligence will be reflected, on average, in higher incomes”
Figure 1b shows the relationship between parents’ and children’s ranking within the wealth distribution, prior to any inheritance. The data indicate that, even before inheritance, the higher the ranking of parents in the wealth distribution, the higher the ranking of their biological children. The strength of this positive relationship, measured by the coefficient, is .35.
Figure 1b: Within-Cohort Wealth Rank Relationship between Parents and Own-birth Children Parents in the top and bottom 5% of the within-cohort wealth distribution are dropped Black, Devereuz, Laundborg and Majlesi
Is Mankiw right to link this strong relationship to genetic factors? Well, to distinguish the role of nature versus nature in the intergenerational transmission of wealth, four economists, in an NBER working paper, compared the wealth of adoptive children to the wealth of their adoptive and biological parents.
The relationship between the wealth ranking of adoptive children and with those of their adoptive parents is strikingly positive and almost as strong as the relationship between parents and their biological children with a coefficient of .27.
Figure 2b: Within-Cohort Wealth Rank Relationship between Parents and Children and Their Adoptive Parents Black, Devereuz, Laundborg and Majlesi
More conclusively, the relationship between the wealth ranking of adopted children and with the ranking of their biological parents is much weaker with a coefficient of .11. In other words, a child’s wealth is more strongly correlated with the wealth of their adoptive parents than to the wealth of their biological parents. Nurture, when it comes to wealth, is far more important than nature.
But overall, who had a higher net wealth at the age of 44 prior to any inheritance? Biological children or adopted ones? If Mankiw is right to assume that inherited genes determines earnings, then biological children must have accumulated relatively more money than adopted ones.
It turns out that the biological children had in fact accumulated more net worth; but by a very small, and almost irrelevant, margin. On average, biological children held 5% more in net wealth than adopted ones.
Intergenerational Relationships
Dependent Variable: Child Rank in Within-Cohort Wealth Distribution Notes: All specifications include cohort dummies for parents and children. Parental wealth is measured in 1999 and child wealth is measured in 2006. All parents are alive in 1999 and at least one of the (adoptive) parents of (adopted) biological children is alive in 2006. Parental wealth is calculated as combined wealth of the mother and father divided by two. *** p<0.01, ** p<0.05, * p<0.1. Standard errors clustered by adoptive family. Black, Devereuz, Laundborg and Majlesi
Equally interesting, the researchers study the variation in attainment of education levels between adopted children and biological ones. If genetic factors matter more than access to opportunity, then biological children of affluent parents must attain higher levels of education than their adopted counterparts. Is this true?
Well, The data suggest otherwise. Biological children completed 0.4 of a year more education on average than the adopted children.
Summary Statistics
Notes: * Monetary values are reported in Swedish Krona on December 31, 2000. At the time, the exchange rate was 1 USD = 9.42 SEK. Parental wealth is calculated as combined wealth of the mother and father divided by two. Black, Devereuz, Laundborg and Majlesi
Mankiw seems to get it wrong when it comes to intergenerational transmission of wealth, and he is not alone. Wealth, like most things in life, has more to do with environmental factors than genetic ones. There are lots of reasons why Ivanka Trump is rich like her father; an inherited gene is certainly not one of them.
References
Mankiw, N. Gregory. “Defending the One Percent.” Journal of Economic Perspectives 27 (2013): 21-34. Accessed August 6, 2015.
Sandra Black, Paul Devereux, Petter Lundborg, and Kaveh Majlesi. ” Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth.” No. 21409 (2015). National Bureau of Economic Research. Web. 6 Aug. 2015.
