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Long-Run Saving Dynamics: Evidence from Unexpected Inheritances

Jeppe Druedahl and Alessandro Martinello

This paper makes two contributions to the consumption literature. First, we exploit inheritance episodes to provide novel causal evidence on the long-run effects of a large financial windfall on saving behavior. For identification, we combine a longitudinal panel of administrative wealth reports with variation in the timing of sudden, unexpected parental deaths. We show that after inheritance net worth converges towards the path established before parental death, with only a third of the initial windfall remaining after a decade. These dynamics are qualitatively consistent with convergence to a buffer-stock target. Second, we interpret these findings through the lens of a generalized consumption-saving framework. To quantitatively replicate this behavior, life-cycle consumption models require impatient consumers and strong precautionary saving motives, with implications for the design of retirement policy and the value of social insurance. This result also holds for two-asset models, which imply a high marginal propensity to consume.

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Paper and code for the project "Long-Run Saving Dynamics: Evidence from Unexpected Inheritances", by Jeppe Druedahl and Alessandro Martinello

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