Do Parents Propagate Income Inequality among Children? Evidence from Chinese and Swedish Twins

Abstract

Economists have devoted a tremendous amount of attention to understanding the role of parents in driving within-family income inequality and the motives behind their decisions. The empirical evidence, however, is mixed. In this paper, we attempt to reconcile these mixed findings using twins data from China and Sweden for the predominant mechanisms emphasized in the literature. Specifically, we first demonstrate that parents tend to invest a similar amount of resources in their children during childhood. By examining how parents make inter vivos transfer decisions, we then show that parents in China tend to reinforce within-family income inequality, whereas parents in Sweden tend to transfer similar amounts to both children. Third, we find that bequests tend to be divided equally among children both in China and Sweden. Fourth, we show that parents with analogous levels of education in China and Sweden tend to have similar attitudes towards within-family income inequality. In particular: parents without a high school diploma tend to reinforce income inequality between their children whereas parents with at least a high school degree tend to transfer similar amounts to both children. As such, depending on the fraction of parents without a high school degree in the population, researchers can find that parents tend to compensate or reinforce income inequality between the children. Finally, exploring motives behind the reinforcing transfers, we show that they are primarily driven by an exchange.

Keywords: Intrahousehold Allocation; Personal Income, Wealth, and Their Distributions; Intergenerational Transfers

JEL Classification: D13, D31, D64, I24, J12, J13, O15