Contents

15.1. Introduction 1304

15.2. TheLong-RunEvolutionofWealth-IncomeRatios 1308

15.2.1 Concepts, Data Sources, and Methods 1308

15.2.1.1 CountryBalanceSheets 1308

15.2.1.2 Concepts and Definitions: Wealth Versus Capital 1309

15.2.2 TheVery Long-Run: Britain and France, 1700-2010 1310

15.2.3 OldEuropeVersustheNewWorld 1312

15.2.4 The Return of High Wealth-Income Ratios in Rich Countries 1316

15.3.

15.3.1 Concepts, Data Sources, and Methods 1319

15.3.2 The European Pattern: France, Britain, and Sweden, 1810-2010 1320

15.3.2.1 France 1320

15.3.2.2 Britain 1322

15.3.2.3 Sweden 1324

15.3.3 The Great Inequality Reversal: Europe Versus the United States, 1810-2010 1325

15.4. The Long-Run Evolution of the Share of Inherited Wealth 1326

15.4.1 Concepts, Data Sources, and Methods 1326

15.4.1.1 Basic Notions and Definitions 1327

15.4.1.2 TheKotlikoff-Summers-ModiglianiControversy 1328

15.4.1.3 TheLimitationsofKSMDefinitions 1330

15.4.1.4 The PPVR Definition 1331

15.4.1.5 A Simplified Definition: Inheritance Flows versus Saving Flows 1333

15.4.2 The Long-Run Evolution of Inheritance in France 1820-2010 1334

15.4.2.1 The Inheritance Flow-National Income Ratio b_yt 1334

15.4.2.2 The Inheritance Stock-Aggregate Wealth Ratio φ_t 1337

15.4.3 Evidence from Other Countries 1339

15.5. Accounting for the Evidence: Models and Predictions 1342

15.5.1 Shocks Versus Steady States 1342

15.5.2 TheSteady-StateWealth-IncomeRatio: β¼s/g 1344

15.5.3 The Steady-State Capital Share: a ¼ r ■ β ¼ a ■ 't~~ 1349

15.5.4 The Steady-State Level of Wealth Concentration: Ineq ¼ Ineq (r— g) 1351

15.5.4.1 An Illustrative Example with Closed-Form Formulas 1352

15.5.4.2 Pareto Formulas in Multiplicative Random Shocks Models 1355

15.5.4.3 On the Long-Run Evolution of Ã- g 1356

Handbook of Income Distribution, Volume 2B

© 2015 Elsevier B.V.

All rights reserved.

ISSN 1574-0056, http://dx.doi.org/10.1016/B978-0-444-59429-7.00016-9

15.5.5 TheSteady-StateLeveloftheInheritance1360

15.5.5.1 The Impact of Saving Motives, Growth, and Life Expectancy 1360

15.5.5.2 A Simple Benchmark Model of Aging Wealth and Endogenous μ 1361

15.5.5.3 Simulating the Benchmark Model 1363

15.6. ConcludingCommentsandResearchProspects 1365

Acknowledgments 1366

References 1366

Abstract

This chapter offers an overview of the empirical and theoretical research on the long-run evolution of wealth and inheritance. Wealth-income ratios, inherited wealth, and wealth inequalities were high in the eighteenth to nineteenth centuries up until World War I, then sharply dropped during the twentieth century following World War shocks, and have been rising again in the late twentieth and early twenty-first centuries. We discuss the models that can account for these facts. We show that over a wide range of models, the long-run magnitude and concentration of wealth and inher­itance are an increasing function of r — g where r is the net-of-tax rate of return on wealth and g is the economy's growth rate. This suggests that current trends toward rising wealth-income ratios and wealth inequality might continue during the twenty-first century, both because of the slow­down of population and productivity growth, and because of rising international competition to attract capital.

Keywords

Wealth, Inheritance, Distribution, Growth, Rate of return, Pareto coefficient

JEL Classification Codes

E10, D30, D31, D32

15.1.