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The role of intergenerational transfers in aggregate wealth accumulation has received a substantial amount of attention and generated considerable controversy, starting with the seminal paper by Kotlikoff and Summers (1981). At the most general level, this literature is motivated by two key questions. What motivates people to accumulate wealth and give transfers? What are the effects of government policies on wealth accumulation?
It is difficult to quarrel with the KS (1981) conclusions that intergenerational transfers play an important role in the wealth accumulation process and need to be studied more carefully. It is also clear that KS deserve credit for sparking interest in these broad and important issues. Researchers have made significant progress in the past 20 years in understanding both the motivations for saving and the effects of public policies on wealth accumulation.
But it is also the case that the KS methodology provides only limited guidance on the two key questions, for several reasons. First, estimates of the magnitude of “life-cycle wealth” (or its counterpart, transfer wealth) have proven difficult to pin down empirically. Second, even if transfer wealth and life-cycle wealth were known with precision, that information would not be sufficient to distinguish among the various proposed motives for why people accumulate wealth. Third, the effects of government policies on wealth accumulation depend in large part on the motives for transfers on the margin. Thus, estimates of the size of aggregate transfer wealth and life-cycle wealth are useful in motivating and framing the relevant questions, but by themselves they do not provide sufficient information to address the two key questions.