The role of nature versus nurture in wealth and other economic outcomes and behaviours

Sandra Black, Paul Devereux, Petter Lundborg, Kaveh Majlesi 16 May 2019

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Wealth inequality has increased dramatically in recent decades. This fact, in conjunction with the publication of Thomas Piketty’s Capital in the 21st Century which highlights the intergenerational transmission of wealth as a key determinant of the nature of society more generally, has renewed interest in understanding the determinants of the intergenerational correlation in wealth (Piketty 2014). However, unlike the intergenerational transmission of education and income, we know relatively little about the determinants of intergenerational wealth mobility, even though wealth may be a better measure of economic success than income or education. Wealth directly influences consumption and investment possibilities, and greater wealth may enable parents to invest more in children’s human capital by loosening budget constraints.

Why is wealth correlated across generations? One possible pathway is through biology (nature) – genetic inheritance of skills, attitudes, and preferences that correlate with higher wealth in each generation.  This channel suggests that intergenerational correlations arise because children from wealthy families are inherently more talented and would be wealthier than others even without the advantage of growing up with wealthier parents. 

Another pathway is environment (nurture) – wealthier parents may invest more in their children’s human capital, help their children get better jobs, provide funding for business start-ups, give financial gifts, or affect child preferences or attitudes. This channel suggests that intergenerational correlations arise through opportunities provided by the environment the child grows up in, and any child given these opportunities would benefit.  And these two forces may interact, with environmental effects depending on biological endowments.  The nature-nurture distinction is of great importance for our perspective on the intergenerational wealth correlation, as appropriate policy to address the high level of wealth inequality relies on an understanding of the underlying causes. 

In our recent research (Black et al. 2019), we attempt to disentangle the role of nature versus nurture and the role of nature/nurture interactions in the intergenerational transmission of wealth.  We do so by focusing on adoptees. Adoption allows us to examine the effects of environmental factors in a situation where children have no genetic relationship with their (adoptive) parents.  We can thus examine whether adoptive parent wealth or biological parent wealth better predicts child wealth.  To do so, we use Swedish administrative data on the net wealth and other characteristics of a large sample of adopted children born between 1950 and 1970 merged with similar information for their biological and adoptive parents, as well as corresponding data on own-birth children (children raised by their biological parents).  We merge this to Swedish wealth data collected for tax purposes between 1999-2006. 

Finally, we also examine whether the forces that drive intergenerational wealth transmission look similar to the ones driving the persistence of other economic outcomes such as income and education. 

Our findings

Figure 1 shows the relationship between the within-cohort rank of child net wealth and that of their biological and adoptive parents. We see that the relationships are approximately linear and that the relationship between wealth of the child and the wealth of adoptive parents is stronger than the equivalent relationship with the wealth of the biological parents.

Figure 1 Within-cohort wealth rank relationship between adopted children and their biological and adoptive parents

Thus, we find that, even before any inheritance has occurred, the wealth of adopted children is more closely related to the wealth of their adoptive parents than to that of their biological parents. This suggests that wealth transmission is primarily due to environmental factors rather than because children of wealthy parents are inherently more talented. When we examine the role played by bequests, we find that, once they are taken into account, the role of environment becomes even stronger. 

Comparing wealth to other economic outcomes and behaviours

When we compare the intergenerational transmission of wealth to that of other outcomes using a common sample and methodology, we find interesting differences. In Figure 2, we plot the biological and adoptive coefficients for the variables we study, also including the 45-degree line. Points above the line imply a larger role for environment (adoptive parent), while points below the line imply a greater role for biology (biological parent).  Consistent with other research, human capital linkages between parents and children appear to have stronger biological than environmental roots, suggesting a potentially important role for innate ability. However, despite this, earnings and income are, if anything, more environmental, suggesting that persistence in earnings and income across generations is not pre-ordained but a function of opportunity at birth.  Outcomes and behaviours that are more directly related to wealth, such as savings and investment behaviour, are disproportionately environmental, with wealth including inheritances at the extreme. The difference in results between the transmission of wealth and human capital is striking, and the greater environmental contribution in the transmission of wealth is consistent with dynasties that transfer wealth and labour market advantages across generations regardless of abilities.

Figure 2 Coefficients on adoptive versus biological parents 

Finally, when we examine consumption, which might be viewed as a summary measure of welfare that is less sensitive to temporary fluctuations than income or wealth, we find both biological and, somewhat larger, environmental influences.  

Conclusion

Overall, our results suggest that the children with wealthy, high-consuming parents benefit not just from good genetics but, more importantly, from growing up with more advantages.  As wealth and consumption become more unequally distributed, children from poorer families have fewer opportunities relative to children from wealthier families, suggesting a potential role for policy to equalise opportunities and to mitigate intergenerational disparities.  That we find this to be the case in Sweden – a relatively egalitarian society – suggests it is likely even more important for a more unequal society such as the US.

References

Black, S E, P J Devereux, P Lundborg, and K Majlesi (2019), “Poor Little Rich Kids? The Role of Nature versus Nurture in Wealth and Other Economic Outcomes and Behaviors”, CEPR Discussion Paper 13559.

Piketty, T (2014), Capital in the Twenty-First Century, Belknap Press.

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Topics:  Education Poverty and income inequality

Tags:  wealth, Intergenerational Mobility, adoption, parents, children, inheritance, nature vs. nature

Professor of Economics, University of Texas, Austin

Professor of Economics at University College Dublin and CEPR Research Fellow

Professor of Economics, Lund University

Associate Professor, Department of Economics, Lund University

Events

  • 17 - 18 August 2019 / Peking University, Beijing / Chinese University of Hong Kong – Tsinghua University Joint Research Center for Chinese Economy, the Institute for Emerging Market Studies at Hong Kong University of Science and Technology, the Guanghua School of Management at Peking University, the Stanford Center on Global Poverty and Development at Stanford University, the School of Economics and Management at Tsinghua University, BREAD, NBER and CEPR
  • 19 - 20 August 2019 / Vienna, Palais Coburg / WU Research Institute for Capital Markets (ISK)
  • 29 - 30 August 2019 / Galatina, Italy /
  • 4 - 5 September 2019 / Roma Eventi, Congress Center, Pontificia Università Gregoriana Piazza della Pilotta, 4, Rome, Italy / European Center of Sustainable Development , CIT University
  • 9 - 14 September 2019 / Guildford, Surrey, UK / The University of Surrey

CEPR Policy Research