Inherited vs self-made wealth: Theory & evidence from a rentier society (Paris 1872–1927)

https://doi.org/10.1016/j.eeh.2013.07.004Get rights and content

Highlights

  • Data set of more than 160,000 individual estate tax records for Paris 1870‐1922.

  • Separate savers (who accumulate more than the capitalized value of what they inherited) from rentiers (who accumulate less).

  • The share of inherited wealth was high 70%.

  • The share of rentiers were remarkably stable before the Great Depression.

  • Inherited wealth critical in wealth accumulation most likely far more than life cycle savings.

Abstract

We divide decedents into two groups: “rentiers" (whose wealth is smaller than the capitalized value of their inherited wealth) and “savers” (who consumed less than their labor income). Applying this split to a unique micro data set on inheritance and matrimonial property regimes, we find that Paris from 1872 to 1927 was a “rentier society”. Rentiers made up about 10% of the population of Parisians but owned 70% of aggregate wealth. Rentier societies thrive when the rate of return on private wealth r is larger than the growth rate g (say, r = 4% vs g = 2%). This was the case in the 19th and early 20th centuries and is likely to happen again in the 21st century. At the time, top successors’ capital income sustains living standards far beyond what labor income alone would permit.

Introduction

The relative importance of inherited versus self-made wealth is a controversial topic in social science. Beyond academia, modern societies (France included) often extol the opportunities they offer for upward social mobility. As such, political discourse celebrates hard work and high savings over inheritance or luck as paths to material well-being and wealth. Positive references to social mobility are so commonplace that such mobility is often accepted as a fact (rather than a goal). Yet, we know very little about the relative importance of inherited wealth and self-made wealth.

This paper starts with the traditional definition of an individual's inherited wealth as the capitalized value of the wealth he or she inherited. From there we define two groups. The first are “inheritors” (rentiers): their assets are smaller than the capitalized value of the wealth they inherited (they consumed more than their labor income). The second group comprises “savers” (self-made individuals): their assets are greater than the capitalized value of the wealth they inherited (they saved part of their labor income). We apply these definitions to an extraordinarily rich data set we collected from individual estate tax records in Paris between 1872 and 1927.

In each year, inheritors made up about 10% of Parisians and owned about 70% of the wealth. Inherited wealth was as large as 80% of aggregate wealth. More importantly, rentiers are an ever increasing share of the population in higher fractiles. They made up only a quarter of the middle class (wealth fractile P50–90). They accounted for half of the “middle rich” (P90–99), and over 70% of the “very rich” (P99–100). This does not mean that there were no savers. Even the wealthiest fractile contains about a quarter of individuals who inherited little wealth and made their way to the top. But they were a minority. The other remarkable pattern is that this very high share was quite stable from 1872 to the Great Depression. In fact, Paris between 1872 and 1927 was the quintessence of a rentier society. That is, a society dominated by individuals who received and left large bequests. Moreover, spending part of the return to their inherited wealth allowed them lifestyles far beyond what labor income and individual merit alone would have permitted. Paris at this time looked more like a “city of rentiers” than a “city of opportunity.”

To our knowledge, we are the first to carry out this simple breakdown between inheritors and savers. However, exploratory computations suggest that today's rentiers' shares in population and wealth are probably only somewhat lower than in Paris from 1872 to 1927. Indeed, wealth concentration in developed societies has fallen less than some observers tend to imagine. When we compare the wealth distributions prevailing in France around 1910 to today's France and United States, it is clear that France on the eve of WWI was very unequal. The top 10% of the population, which one might call the “upper class,” owned over 85% of the wealth. The past century has seen the growth of a middle class, both in France or the United States. Yet one should not overstate the quantitative importance of these historical changes. Even today, the middle class wealth share in the United States is only 26%; the upper class wealth share is 72%, less than the 87% observed in 1910 France but still huge. And much of that wealth is likely to be bequeathed at death. In Paris, our laboratory, wealth concentration was even more extreme: the top 10% wealth share was over 95% in Paris in 1912, and the top 1% share above 60%. The wealth shares of the bottom 50% (the “poor”) and the middle 40% (the “middle class”) were close to 0%. Basically there was no middle class.

More generally, although the economy of Paris between 1872 and 1927 was quite different from contemporary economies, the mechanics of inequality have not changed. They involve, among other things, life expectancy, returns to investment, savings decisions, and tax policy. Wealth accumulation is always associated with significant inequality and it involves different groups of agents with distinct wealth trajectories. Such a process simply cannot be properly understood and analyzed within a representative agent framework.

Finally, the relative importance of inherited wealth is growing, pushing far beyond the low levels seen from 1945 to 1980. That period probably has had too much influence on modern economic thinking, because it featured unusually strong ties between the lifecycle and wealth accumulation. In fact, in the next few decades inherited wealth is likely to reach a level close to what it had been in Paris between 1872 and 1927. As one of us has recently shown for France, the aggregate inheritance flow shows a very marked U-shape over the past century (see Piketty, 2011). The pattern comes partly from the evolution of the private wealth-income ratio. This ratio was unusually low in the 1950s, due to war losses, and low real estate and stock prices and then kept down by the slow pace of age-wealth profiles' return to their steep pre-WWI slopes. The key mechanism driving aggregate inheritance's rebound to its former high levels is simple: the rate of return on private wealth r (3 to 5%) is larger than the rate of growth of the economy g (1% to 2%). As long as r > g, past wealth and inheritance are bound to play a key role in current wealth. Before WWI and since 1990 r has been roughly twice g. As we shall see here, this “r > g” logic matters both at the aggregate level and for the micro structure of lifetime inequality. It is critical to the emergence and endurance of rentier societies.

This research is related to several literatures. First, it continues the work begun in Piketty et al. (2006). There, we focused on the long-run evolution of cross-sectional wealth concentration in France. Here, we rely on details of marriage law to relate each decedent's wealth to the bequests and gifts he or she had received while alive. On a second level, it seeks to move the analysis of long-run trends in income and wealth inequality pioneered by Kuznets (1953), and recently revived by Atkinson and Piketty, 2007, Atkinson and Piketty, 2010 and Atkinson et al. (2011), away from its heavy reliance on published aggregate data towards more micro based sources. While published data have allowed scholars to describe the evolution of income or wealth inequality in more than two dozen countries, they are of little help for explaining that evolution.

More directly, our methodological innovation and our estimates relate to the literature on intergenerational transfers and wealth accumulation as well as to debates over the extent of life cycle versus dynastic savings in aggregate wealth. As we discuss further below, we were inspired by the debate between Kotlikoff, 1988, Kotlikoff and Summers, 1981 and Modigliani, 1986, Modigliani, 1988 over the share of inherited wealth in total wealth. Finally, our work is also related to the recent literature attempting to introduce wealth heterogeneity into calibrated general equilibrium macro models (see Cagetti and De Nardi (2008) for a recent survey). One limitation of this literature is that inheritance parameters tend to be imprecisely calibrated (and are generally underestimated; see Piketty (2011)). Here we develop a particular way to introduce heterogeneity (inheritors vs savers), which we hope will be useful for macro modeling and the welfare analysis of various macro policies. Let us start with this heterogeneity.

Section snippets

Basic notations and definitions

Consider a population of size Nt with aggregate private wealth Wt and national income Yt = YLt + rtWt, where YLt is aggregate labor income, and rt is the average rate of return on private wealth. Let wt, yLt, yt be the per capita analogs of Wt, YLt, and Yt.

Consider a given individual i with wealth wti at time t, bti0 is the bequest she received at time ti < t. Let bti* = bti0 er(ti,t) be the capitalized value of bti0 at time t (where r(ti,t) is the cumulated rate of return between time ti and time t).

Estate tax data in France

To estimate the joint distribution Gt(wti,bti*) of wealth and capitalized bequests, we take advantage of the exceptional quality of French estate tax data. In most cases, getting wealth at death and bequests received would require matching estate tax returns across two generations. That process is expensive for large populations and often suffers from severe sample attrition problems. The French matrimonial regime luckily allows us to observe wealth across two generations. The very specific

Descriptive statistics

The population of Paris rose sharply between 1872 and 1912, and so did the annual number of adult decedents: from about 25,000 decedents in 1872 to over 35,000 decedents in 1882–1912, and a bit less in the 1920s (See Table 1). Before 1912 at least 70% of adult Parisians died with no wealth at all (at a time when it was about 50% for the all of France). That share only began to fall in the 1920s, but it was still above 60% in 1927.

Second, although poor people were more frequent in Paris than in

Conclusion

This paper has shown that the methodology and data one uses to evaluate the relative importance of life-long accumulation of wealth versus inheritance are critical. Modigliani's approach generally understates the role of inheritance because it fails to recognize that inherited assets deliver positive flow returns. Although the Kotlikoff–Summers' method capitalizes observed bequests, it overstates the role of inherited wealth because it does not subtract from the stock of capitalized bequest the

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We are grateful to seminar participants at PSE, Caltech, Harvard-MIT, Northwestern, UCLA, the University of Arizona, USC, and Yale for their comments; to Laura Betancur, Maria Chichtchenkova, Melike Kara, Alena Lapatniova, Nicolas Pastore, Esteban Reyes, Tatiana Shukan, Stela Suhan, Asli Sumer, and Nazli Temir for research assistance; and to Caltech, the United States' NSF (SES 0452081), and France's ANR (grants Patrimoine and Capital) for financial support. All comments are welcome ([email protected], [email protected], [email protected]). A detailed data appendix is available on-line at piketty.pse.ens.fr/rentiersociety/.

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