What makes people rich — their genetics or environment?

 
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The unlikely story of two pairs of identical twins in Colombia who, because of a hospital error, were raised as two sets of fraternal twins made international headlines in 2015. It is a tale of two mismatched brothers who grew up together on a remote farm in Santander and eventually connected with their identical twins, who had lived their own mismatched lives in urban Bogota. What may have fascinated audiences is how much two key factors — genetics and the environment — determined each man’s fate. The men who were raised in the city received a better education and have professional careers while the two who grew up in the country are butchers who did not finish high school. Despite their financial and educational differences, each set of identical twins – with one man from the country and one from the city – shares some of the same personality traits and mannerisms.

Government officials, especially those who set education policy in the United States, are generally aware of the significant role that children’s home environments can play in their academic development. Officials are continually creating policies and mandates to try to help disadvantaged students overcome the challenges of poverty so they gain access to the same educational opportunities and career opportunities as their wealthier peers. Even as policymakers wrestle with this issue, income inequality continues to rise in the U.S. and new research shows that even after earning college degrees, the median net worth of blacks and Hispanics fell from 1992 to 2013.

For decades, scholars have studied the “nature versus nurture” question of whether a person’s heredity or environment has the largest impact on his or her chances for success in life. A 2015 paper for the National Bureau of Economic Research contributes new insights to this ongoing debate. For the study, titled “Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth,” researchers analyzed data collected from the Swedish adoption system to see how the wealth of adopted children is related to the wealth of their biological parents and adoptive parents. The researchers — Sandra Blanks of the University of Texas at Austin, Paul Devereux of University College Dublin and Petter Lundborg and Kaveh Majlesi from Lund University in Sweden – used administrative data on the net wealth of a large sample of adopted children born between 1950 and 1970 and merged it with information about their biological and adoptive parents. The average age of children in the sample is 44.

Key findings include:

  • The wealth of adoptees is predominantly associated with their adoptive parents. The wealth of adoptees has a “much weaker relationship” with biological parents’ wealth.
  • The correlation of wealth between adoptees and their adoptive parents is even stronger when adoptees inherit wealth from their adoptive parents.
  • The correlation of wealth between adoptees and their adoptive parents is similar for male and female children.
  • Environmental influences played a much larger role in the transmission of wealth from parent to child. This suggests that innate ability and talent are small factors in this intergenerational relationship.

The authors were not able to determine the reasons why there is a strong correlation in wealth across generations. While wealthier parents tend to be better educated and have higher incomes, the authors found little evidence that these characteristics affect child wealth. The authors also found little evidence that larger investments in children’s educations and careers leads to a higher level of child wealth. “It is clear from our results that innate childhood abilities do not drive the intergenerational correlations in wealth we observe; however, more work is required to determine the exact mechanisms through which wealthy parents create wealthy children,” the authors stated.

Related research: A 2015 Harvard University study, “The Impacts of Neighborhoods on Intergenerational Mobility: Childhood Exposure Effects and Country-Level Estimates,” explores the ways in which geographical circumstances affect people’s life opportunities.

 

Keywords: children, parenting, life opportunities, poverty, rich kids, household income

Last updated: September 14, 2015

 

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Citation: Black, Sandra E.; Devereux, Paul J.; Lundborg, Petter; Majlesi, Kaveh. "Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth," Working Paper for the National Bureau of Economic Research, 2015. doi: 10.3386/w21409.