Seminar December 15, 2014

Title: Inheritances And Saving Patterns; The Long-Run Effects Of Cash-On-Hand On Wealth Accumulation

Abstract:

Do the rich save more? This paper exploits inheritance flows in Denmark to pro- vide evidence on how a change in available resources affect saving behavior. Combining the random timing of parental death with a unique panel dataset of third-party reported individual wealth holdings drawn from Danish administrative records, I estimate the causal effect of money windfalls on saving rates. This paper is the first to show not only that large windfalls of money crowd-out wealth accumulation in the long run, but also that they affect differently the accumulation of different wealth components. In the short run, heirs use inheritances to accumulate liquid assets, invest in the financial market and amass housing equity, but not to repay existing debts. In the long run, they deplete this excess of wealth by slacking their saving efforts. An increase in available resources of one year of permanent income cuts saving rates by ten percentage points in two years, effectively zeroing wealth accumulation and strong effects persists until up to four to five years. These results not only imply that inheritance taxation can depress consumption, but provide micro-founded evidence on the relationship between wealth and savings that can be compared against predictions from existing consumption theories.