Intergenerational Transmission of Economic Advantages and Disadvantages from the Asset Perspective

Background: Intergenerational economic mobility is a critical determinant of children’s chances of getting ahead in adulthood. Children benefit from intangible opportunities (e.g., parents’ social connections) and parents’ direct investments in their future. For example, parents pay to live in neighborhoods where their children could receive high-quality education. Despite the different channels through which parents’ economic success influence their children’s economic well-being in adulthood, efforts to understand intergenerational economic mobility often focus parochially on intergenerational transmission of earnings and income. This study contributes to the understanding of the intergenerational transmission of economic status from the assets perspective by focusing on how parents’ net worth affects their children’s future net worth. In addition, we examine the racial differences in the intergenerational transmission of net worth.

Methods: This study uses data from the National Longitudinal Survey of Youth 1997, which contains information on net worth and assets of adult children and parents. We use three follow-up waves at adult children’s ages 20, 25, and 30. The sample consists of 8,131 adult children. The continuous dependent variable is adult children’s net worth at ages 20, 25, and 30, and the continuous independent variable of interest is parents’ net worth in 1997. We use growth-curve models to capture how adult children’s net worth vary by parents’ net worth. To address possible endogeneity concerns, although we assume that the explanatory variables are not correlated with the unobservable individual effects (E[c_i|X_i]=0), we use the Hausman test to check whether fixed effects or random effects model is preferred. The non-significant Hausman test indicates that random effects model is appropriate and more efficient.  

Results: Results from the simple unconditional means (UCM) model suggest that adult children’s net worth increases as they age. The marginal effect is highly significant (β=.092, p<.001). We expand the UCM model to include parental net wealth and relevant covariates such as parental and adult children’s socioeconomic status and demographics. Parental net worth is a strong predictor of adult children’s net worth (β=.107, p<.001). To examine how growth over time varies by an individual, we allow the random slope to vary (β=.104, p<.001). The estimate from the random-effects component is .0012, which might at first seem small, but has the potential to shift the parents’ net worth by 11% or more  for the one-sixth of the population with parents’ net worth larger than one standard deviation. Finally, our analyses demonstrate that racial differences in the transmission process are pronounced. For example, White children’s net worth (β=.151, p<.001) is significantly affected by their parental net wealth, but Black and Hispanic children’s net worth is hardly affected by their parental net wealth.

Conclusions and Implications: This study finds that parents’ new worth is a strong indicator of children’s future new worth, although racial heterogeneity in the wealth transmission exists. The findings indicate that parents’ assets are effective in promoting the chances of children succeeding professionally and economically. Thus, such findings support continued and expanded efforts to encourage the poor to hold savings and build assets.