Heterogeneous earning responses to inheritance: new event-study evidence from Norway

TL;DR

This study uses Norwegian data to analyze how large inheritances influence recipients' wages, employment, and entrepreneurship over 20 years, revealing heterogeneous effects by age, sex, and inheritance size.

Contribution

It introduces a dynamic, cohort-specific analysis of inheritance effects on labor supply, extending the observation window to 20 years and avoiding control group selection bias.

Findings

Large inheritances reduce wages and occupational income by up to 4.3%.

Inheritance increases self-employment probability by over 1%.

Effects vary by sex, age, and inheritance size, with long-lasting impacts.

Abstract

It has long been assumed that inheritances, particularly large ones, have a negative effect on the labor supply of inheritors. Using Norwegian registry data, I examine the inheritance-induced decline in inheritors' wages and occupational income. In contrast to prior research, my estimates allow the dynamic effect of inheritances on labor supply to vary among inheritor cohorts. The estimation approach adopted and the 25-year long panel data make it possible to trace the dynamics of the effect for at least 20 years, which is twice as long as the study period in previous studies. Since all observations in the sample are inheritors, I avoid the selection problem arising in studies employing non-inheritors as controls. I find that large parental inheritances (more than one million Norwegian kroner) reduce annual wage and occupational income by, at most, 4.3%, which is about half the decrease previously identified. The magnitude of the effect increases with the size of the inheritance. Large inheritances also increase the probability of being self-employed by more than 1%, although entrepreneurship may be dampened by inheritances that are excessively large. The inheritance effect lasts for up to 10 years and is heterogeneous across sexes and age groups. Male heirs are more likely to reduce their labor supply after receiving the transfer. Young heirs are more likely to be self-employed, and their annual occupational income is, therefore, less affected by inheritances in the long run; for the very young inheriting large amounts of wealth from their grandparents, the probability of their attaining a post-secondary education declines by 2%.