Long-term effects of equal sharing: Evidence from inheritance rules for land

Long-Term Economic Effects of Wealth Distribution

What are the long-term economic effects of a more equal distribution of wealth? The answer to this question has become particularly relevant due to rising levels of income and wealth inequality (Piketty and Saez 2014). The debate has remained active due to the scarcity of suitable data and credible research designs that allow for an estimation of causally interpretable effects, as variations in inequality likely correlate with drivers of growth (Banerjee and Duflo 2003).

Geographic Variation in Inheritance Rules

In a new paper (Bartels et al. forthcoming), we contribute to this debate by leveraging sharp geographic variation in institutions that govern how resources are passed from parents to children. In unequal division areas, agricultural property was considered indivisible and had to be passed on to a single heir. In contrast, agricultural land and other property had to be divided equally among all children in equal division areas. We digitised and geocoded data from fine-grained historical surveys to compile a map of inheritance rules across the entire German empire. Broadly speaking, equal division of agricultural land was prevalent in parts of Southern and Western Germany, as illustrated in Figure 1. However, the boundary between the two inheritance rule regimes traversed political, linguistic, geological, and religious borders. We analyse historical and long-run effects of these inheritance rules using OLS regressions with a rich set of controls and a geographic regression discontinuity (RD) design.

Effects on Land Inequality

Our analysis reveals that inheritance regulations indeed influenced inequality of land – the key store of wealth in an agricultural society – during the peak of the industrialisation period (1870-1914). Equal division areas featured lower levels of landholding inequality and a larger share of small farms (see Figure 2). This finding is non-trivial: for example, by a Coasean argument, inter vivos land transactions should undo the equalising effect of equal division if transaction costs were low and concentrated ownership optimal.

Long-Term Growth in Equal Division Regions

Our study unveils that equal division of land has generated higher long-term growth. Putting together a large panel data set spanning from early industrialisation to contemporary times, we delineate the trajectory of economic prosperity in equal and unequal division areas. Although income disparities were imperceptible at the turn of the century, the interwar era witnessed a notable divergence in tax revenue per capita, indicative of a widening income and wealth chasm between equal and unequal division regions (see Figure 3). During this period, the chemical and electronics industry developed further, and new industries, like the car industry and its local supply chains, also emerged more forcefully in equal division areas. This trend persisted post-war, culminating in a substantial productivity gap that stabilized at in the 2000s and 2010s (see Figure 4). Today, the income gap is around 6%. The observation that GDP is even higher than distributed income reflects that employees living in unequal division areas commute into equal division areas for work.

Conducive Environment for Innovation and Entrepreneurship

By providing equitable access to land or compensatory resources, equal division areas expanded the pool of potential entrepreneurs. Our analysis reveals a higher prevalence of entrepreneurial activities in equal division regions during the period of high industrialisation in Germany (1870-1914). Specifically, the population share working in manufacturing was higher and this gap widened between 1895 and 1907. The additional employment in manufacturing is fully accounted for by particularly innovative sectors with high patenting activity, which we measure building on data from Streb et al. (2006). Patenting activity itself was also higher in equal division areas between 1877 and 1914.

The proliferation of domestic workshops in equal division farms facilitated experimentation and specialisation, fostering income growth and bolstering Germany’s renowned Mittelstand – comprised of small and medium-sized enterprises. Contemporary data corroborate the enduring legacy of equal division, evidenced by the prevalence of smaller yet more productive firms and a greater proportion of entrepreneurs in equal division regions. The higher share of entrepreneurs in equal division regions today translates into a right-shifted skill, income, and wealth distribution.

Skewed Distribution of Income and Wealth Today

Surprisingly, the long-term prosperity engendered by equal division has resulted in a more skewed distribution of income and wealth. The last collection of the German wealth tax in 1995 (which was only levied on high net-worth individuals; see Albers et al. 2022 as well as their Vox column here) shows that equal division areas are home to about 35 more wealth-tax payers and about seven more millionaires per 10,000 inhabitants, on average. The top income decile and the top income percentile in equal division counties earned 9-14% more in 2013 than their counterparts in unequal division counties. As top income earners are business owners in Germany (Bartels 2019) and business owners typically earn higher incomes than their employees, a higher population share of business owners mechanically increases income concentration at the top. Consequently, income concentration within equal division counties is significantly higher as well, evidenced by higher top income shares in equal division regions. Our finding of higher top income shares in equal division counties supports Aghion et al. (2018) (see their VoxEU column), who document positive correlations between measures of innovation and top 1% income shares across US states since the 1980s. They argue that top incomes have increased particularly in occupations closely related to innovation such as entrepreneurs, engineers, scientists, and managers.

Conclusion

Our study unveils the enduring consequences of land inequality, underscoring the transformative impact of inheritance regulations on long-term prosperity. Drawing on a wide range of historical and modern data, we find positive effects of equal division on long-term productivity and income. We find evidence indicating that the equal division of land spurred industrial by-employment, in particular in innovative and entrepreneurial activities. Our evidence lends support to models in which a more equitable distribution of wealth can spur occupational upgrading and the decision to become an entrepreneur (e.g. Galor and Zeira 1993, Banerjee and Newman 1993, Galor and Moav 2004). The more equal distribution of land – the key store of wealth in 19th century Germany – enabled broad parts of the population to engage in entrepreneurial activities, which provided the breeding ground for today’s innovative Mittelstand and shaped Germany’s industrial geography and industrial relations system (Jäger et al. 2022). Equal division of land proved to be an inclusive economic

SDGs, Targets, and Indicators

SDG 1: No Poverty

• Target 1.4: Ensure that all men and women, in particular, the poor and the vulnerable, have equal rights to economic resources, as well as access to basic services, ownership, and control over land and other forms of property.
• Indicator 1.4.2: Proportion of total adult population with secure tenure rights to land, with legally recognized documentation and who perceive their rights to land as secure, by sex and by type of tenure.

SDG 8: Decent Work and Economic Growth

• Target 8.2: Achieve higher levels of economic productivity through diversification, technological upgrading, and innovation.
• Indicator 8.2.1: Annual growth rate of real GDP per employed person.

SDG 10: Reduced Inequalities

• Target 10.1: By 2030, progressively achieve and sustain income growth of the bottom 40% of the population at a rate higher than the national average.
• Indicator 10.1.1: Growth rates of household expenditure or income per capita among the bottom 40% of the population and the total population.

SDG 11: Sustainable Cities and Communities

• Target 11.1: By 2030, ensure access for all to adequate, safe, and affordable housing and basic services and upgrade slums.
• Indicator 11.1.1: Proportion of urban population living in slums, informal settlements, or inadequate housing.

SDG 16: Peace, Justice, and Strong Institutions

• Target 16.6: Develop effective, accountable, and transparent institutions at all levels.
• Indicator 16.6.1: Primary government expenditures as a proportion of original approved budget, by sector (or by budget codes or similar).

Analysis

1. The SDGs addressed or connected to the issues highlighted in the article are SDG 1 (No Poverty), SDG 8 (Decent Work and Economic Growth), SDG 10 (Reduced Inequalities), SDG 11 (Sustainable Cities and Communities), and SDG 16 (Peace, Justice, and Strong Institutions).

2. Specific targets under those SDGs based on the article’s content are:
– Target 1.4: Ensure that all men and women, in particular, the poor and the vulnerable, have equal rights to economic resources, as well as access to basic services, ownership, and control over land and other forms of property.
– Target 8.2: Achieve higher levels of economic productivity through diversification, technological upgrading, and innovation.
– Target 10.1: By 2030, progressively achieve and sustain income growth of the bottom 40% of the population at a rate higher than the national average.
– Target 11.1: By 2030, ensure access for all to adequate, safe, and affordable housing and basic services and upgrade slums.
– Target 16.6: Develop effective, accountable, and transparent institutions at all levels.

3. Indicators mentioned or implied in the article that can be used to measure progress towards the identified targets are:
– Indicator 1.4.2: Proportion of total adult population with secure tenure rights to land, with legally recognized documentation and who perceive their rights to land as secure, by sex and by type of tenure.
– Indicator 8.2.1: Annual growth rate of real GDP per employed person.
– Indicator 10.1.1: Growth rates of household expenditure or income per capita among the bottom 40% of the population and the total population.
– Indicator 11.1.1: Proportion of urban population living in slums, informal settlements, or inadequate housing.
– Indicator 16.6.1: Primary government expenditures as a proportion of original approved budget, by sector (or by budget codes or similar).

4. Table presenting the findings:

| SDGs | Targets | Indicators |
|——|———|————|
| SDG 1: No Poverty | Target 1.4: Ensure that all men and women, in particular, the poor and the vulnerable, have equal rights to economic resources, as well as access to basic services, ownership, and control over land and other forms of property. | Indicator 1.4.2: Proportion of total adult population with secure tenure rights to land, with legally recognized documentation and who perceive their rights to land as secure, by sex and by type of tenure. |
| SDG 8: Decent Work and Economic Growth | Target 8.2: Achieve higher levels of economic productivity through diversification, technological upgrading, and innovation. | Indicator 8.2.1: Annual growth rate of real GDP per employed person. |
| SDG 10: Reduced Inequalities | Target 10.1: By 2030, progressively achieve and sustain income growth of the bottom 40% of the population at a rate higher than the national average. | Indicator 10.1.1: Growth rates of household expenditure or income per capita among the bottom 40% of the population and the total population. |
| SDG 11: Sustainable Cities and Communities | Target 11.1: By 2030, ensure access for all to adequate, safe, and affordable housing and basic services and upgrade slums. | Indicator 11.1.1: Proportion of urban population living in slums, informal settlements, or inadequate housing. |
| SDG 16: Peace, Justice, and Strong Institutions | Target 16.6: Develop effective, accountable, and transparent institutions at all levels. | Indicator 16.6.1: Primary government expenditures as a proportion of original approved budget, by sector (or by budget codes or similar). |

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Source: cepr.org

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