This report presents several iterations of a stylized model of wealth accumulation that reflect historical patterns in income and wealth shown in prior research. This presentation provides the necessary context to understand the wealth differences among all Americans and those factors, in particular, that contribute to Black-white wealth differences.

Cover: Accounting for Black-White Wealth Differences
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Accounting for Black-White Wealth Differences

A Stylized Model of Wealth Accumulation

by Kathryn A. Edwards

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Research Questions

  1. How do individuals accumulate wealth in the United States?
  2. What factors are mainly responsible for wealth differences among Americans?
  3. What factors mainly contribute to wealth differences between Black and white Americans?

Research has consistently found that income and wealth are not remade every generation but rather are closely linked to the income and wealth of past generations. This context is necessary to understand the current wealth differences between Black and white Americans. The difference in typical, or median, wealth between Black and white households has increased greatly since 1968.

Certain factors, or determinants, have been demonstrated through research to greatly influence income or wealth. This report, part of a discussion paper series investigating the U.S. racial wealth gap, presents several iterations of a stylized model of wealth accumulation that reflect historical patterns in income and wealth shown in prior research. The aim is not to change how wealth disparities and wealth accumulation are researched but to change how they are presented and perceived.

This report describes both broad determinants of wealth differences that apply to all individuals, regardless of race, and those factors, in particular, that contribute to Black-white wealth differences, such as inherited advantage, or how the path of wealth accumulation varies based on parental income and wealth; labor, credit, and housing market discrimination; other shocks and barriers; and different bequests.

Although far from exhaustive, the model conveys not only the large gaps in Black and white wealth but also illustrates how these gaps could worsen over time.

Key Findings

  • The view that wealth accumulation is determined by a mix of choices and ability is incomplete; other factors (outside of individual ability and choices) contribute or constrain an individual's wealth and income.
  • Children are born into the wealth and income of their parents. The more wealth their parents have, the higher their economic starting point.
  • The effects of differing parental income and wealth do not stop when childhood ends and an individual becomes an adult. Arguably the most direct effect of parental wealth on adult children's wealth (though not necessarily the largest) is in the pace and shape of wealth accumulation during early adulthood.
  • Evidence from investigations of intergenerational mobility in the United States has found that parents' economic status is highly predictive of their children's economic status.
  • The available choices, realized shocks, and systemic barriers faced by individuals are not the same; they also vary by race. Critically, shocks and barriers can be reinforcing, and forms of discrimination can interact.
  • Because of the cumulative effect of various factors, the amount of accumulated wealth that remains after an individual dies — a bequest — is not solely based on an individual's savings or consumption behavior.
  • Hence, the effect of differential economic treatment or investment in one group of people could persist for generations. The multigenerational component of wealth accumulation enables disparities to persist, and in the case of Black Americans, the legacy of disparity is reinforced by ongoing systemic barriers, such as discrimination, that curtail economic success.

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Funding for this research was provided by gifts from RAND supporters and income from operations. The research was conducted by RAND Education and Labor.

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