DP8411 Inherited vs Self-Made Wealth: Theory & Evidence from a Rentier Society (Paris 1872-1937)

Author(s): Thomas Piketty , Gilles Postel-Vinay , Jean Laurent Rosenthal

Publication Date: June 2011

Keyword(s): inheritance , wealth accumulation , wealth distribution

JEL(s): D30 , E10 , E60

Programme Areas: Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP8411.asp

This paper divides the population into two groups: the "inheritors" or "rentiers" (whose wealth is smaller than the capitalized value of their inherited wealth, i.e. who consumed more than their labor income during their lifetime); and the "savers" or "self-made men" (whose wealth is larger than the capitalized value of their inherited wealth, i.e. who consumed less than their labor income). Applying this simple theoretical model to a unique micro data set on inheritance and matrimonial property regimes, we find that Paris in 1872-1937 looks like a prototype "rentier society". Rentiers made about 10% of the population of Parisians but owned 70% of aggregate wealth. Rentier societies thrive when the rate of return on private wealth r is permanently and substantially larger than the growth rate g (say, r=4%-5% vs g=1%-2%). This was the case in the 19th century and early 20th century and is likely to happen again in the 21st century. In such cases top successors, by consuming part of the return to their inherited wealth, can sustain living standards far beyond what labor income alone would permit.