Inherited vs Self-Made Wealth. Theory & Evidence from a Rentier Society (Paris 1872-1937)", Working paper

Abstract: 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. The key mechanism generating rentier societies is r>g. 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%), which was the case in the 19th century and early 20th century and is likely to happen again in the 21st century, then top successors, by consuming the return to their inherited wealth, can sustain living standards which were very hard to attain on the basis of labor income alone