Inheritance has a concave effect on the hours worked by British male entrepreneurs

Author: Zhongmin Wu, Nottingham Business School

Using data from the British Household Panel Survey (1998 – 2009), Faria and Wu (2012) find that inheritance has a concave effect on the hours worked by male entrepreneurs. Receiving inheritance increases the labor supply of British male entrepreneurs; however this effect becomes smaller for higher inheritances, eventually turning negative.

Does inheritance create a disincentive to labor? According to the Carnegie conjecture, the greater the inheritance, the lower the recipient’s labor supply. The usual explanation is that inheritance negatively affects the marginal utility of wealth, regardless of whether the inherited wealth is anticipated or not.

Faria and Wu (2012) estimate the labor supply function of nascent entrepreneurs who were unemployed last year. The data used for this research is the British Household Panel Survey (BHPS) from wave 8 to wave 18 (1998 – 2009). The endogenous variable of the model is “Self employed: hours normally worked per week”. The results show that inheritance has a concave effect on the hours worked by male entrepreneurs. This is an important result as it implies that receiving an inheritance has a significant impact on one’s transition from unemployment to entrepreneurship. Receiving an inheritance increases the labor supply of British male entrepreneurs; however this effect becomes smaller for higher inheritances, eventually turning negative. The nonlinear effect peaks on an inheritance value of £41,254, which increases self employed hours worked per week by 8.3 hours (see figure). The results are robust and consistent.

References:

Faria J. and Wu Z. (2012) From Unemployed to Entrepreneur: The Role of the Absolute Bequest Motive, Economics Letters, 114 (1), 120 – 123

 Figure 1

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