Inheritance and Labor Supply

Most inheritances arrive late in people’s working life, when labor supply is especially responsive to wealth. We document this interaction using administrative earnings histories around 135,150 inheritances in Switzerland. We find that inheritors’ average earnings fall at all ages, but the responses peak between ages 55 and 64, largely driven by early retirement. Our data allow us to show that those impact responses are significantly smaller than responses to lottery winnings of comparable size – consistent with the partially anticipated nature of inheritance. A calibrated life-cycle model with endogenous labor supply and early retirement reproduces these patterns and maps the estimated individual responses into lifetime and aggregate effects. Depending on assumptions about bequest motives, we estimate inheritance to reduce aggregate labor supply by between 0.5% and 1.9%. We also quantify how using revenue from an inheritance tax to subsidize labor could increase labor supply.

(An earlier version of this paper circulated under the title “The Output Cost of Inheritance”.)