Altruism, Education and U.S. Wealth Inequality

This paper examines the extent to which intergenerational links through transfers of wealth and investment in human capital might help in accounting for the wealth inequality observed in U.S. data. We examine an overlapping-generations heterogeneous agents economy with idiosyncratic risk and altruistic parents. We extend previous models in two main dimensions. First, wealth transfers are derived on the basis of altruism rather than `joy-of-giving’ as assumed in previous computable OLG models. Secondly, we assume that parents can transfer not only wealth (through inter vivos transfers and bequests) but also human capital through education. We find that these features help significantly for accounting for the large inequality in wealth relative to earnings observed in the U.S. In particular, it is shown that altruism helps to explain why the distribution of wealth is more concentrated than the distribution of income, why bequests appear to be a luxury good and why transfer wealth is so high in relation to total wealth