Wealth distribution and household economies of scale: Do families matter for inequality?

Wealth inequality assumes a central role in the debate on economic inequality. Yet, in contrast to the literature on income distribution, the role of the household in moderating inequality remains poorly understood. This paper argues that economies of scale to household wealth matter crucially, offering both a methodology and empirical results to account for household scale effects. As wealth enters individual utility directly (not at least due to bequest motives), it is possible to test for economies of scale in components of household wealth held for such non-consumption purposes, which may differ from traditional consumption scale effects. Using the model of a capitalist-spirit bequest motive to formalise the decision of allocating wealth between consumption and non consumption purposes, this paper is the first to offer a concept of economies of scale for wealth rather than an ad-hoc approach. Adapting the model to accommodate household size effects, the second contribution of this paper is to estimate wealth economies of scale using satisfaction data from the German Socio-Economic Panel (SOEP), drawing on a non-linear estimator to recover structural model parameters. Next, the article appraises the implications of scale effects adjustments for the distribution of household wealth in Germany. Overall, the findings suggest that non-consumption economies of scale are almost perfect. Since non-consumption wealth matters primarily among the affluent households, adjusting household wealth for size does not affect them strongly, feeding into higher estimates of inequality. For example, the Palma ratio for Germany in 2012 increases by 17.1% once scale effects are taken into account, and the Gini index by 3%. The results do not only inform the academic literature on scale effects, and thus the measurement of inequality and living conditions, but also provides a new perspective on the influence of bequest (motives) on wealth inequality. Since non consumption wealth matters primarily among the affluent households, adjusting household wealth for size does not affect them strongly, feeding into higher estimates of inequality. For example, the Palma ratio for Germany in 2012 increases by 17.1% once scale effects are taken into account, and the Gini index by 3%. The results do not only inform the academic literature on scale effects, and thus the measurement of inequality and living conditions, but also provides a new perspective on the influence of bequest (motives) on wealth inequality.