Inheritance and Labor Supply

Abstract

Using data from the Michigan Panel Study of Income Dynamics and from Federal Estate Tax returns, this paper investigates the labor disincentive caused by inheritance. The results are of interest for several reasons. Whether or not inheritances are a strong labor disincentive figures prominently in the controversy surrounding the relative importance of inheritances and life-cycle savings as sources of U.S. wealth. Also, the size of the disincentive is important in determining the relationship between inheritance and inequality. Our results indicate that inheritances do not lead to large reductions in the labor supply of men and married women. Family consumption increases after an inheritance, but again the effect is small.