The Effects of Inheritance Expectation on Current Economic Behavior

Abstract: According to the standard life-cycle hypothesis, all expected future incomes should be incorporated into an individual’s life-time budget and therefore affect current economic behavior. As inheritances can be anticipated to some extent, I test if expectations on receiving an inheritance in the future affect individuals’ current decisions about their labor supply, savings and consumption. To empirically test this, I take advantage of the combined facts that individuals in Sweden are legal heirs to their childless sibling and that the probability of inheriting a childless sibling increases with time due to the negative relationship between age and fertility. If individuals internalize the expected inheritance, we should observe a readjustment in labor supply and consumption at the time of an unexpected birth of a nephew or niece and onwards. Exploiting the variation in the expected inheritance loss, I find that individuals internalize expected inheritances by readjusting their savings after this event. I do not find any overall effects in labor supply or consumption. However, there seems to exist some heterogeneity in responses between males and females, where males only adjust their savings while females adjust both their labor supply and savings.