Decomposing the Growth of Top Wealth Shares

Abstract

What drives the dynamics of top wealth inequality? To answer this question, I propose an accounting framework that decomposes the growth of the share of aggregate wealth owned by a top percentile into three terms: a within term, which is the average wealth growth of individuals initially in the top percentile relative to the economy; a between term, which accounts for individuals entering and exiting the top percentile due to changes in their relative wealth rankings; and a demography term, which accounts for individuals entering or exiting the top percentile due to death and population growth. I obtain closed‐form expressions for each term in a wide range of random growth models. Evidence from the Forbes 400 list suggests that the between term accounts for half of the recent rise in top wealth inequality.

The Life-Cycle Dynamics of Wealth Mobility

“…Importantly, a snapshot of the wealth distribution or a measure of wealth mobility computed on a shorter panel would not contain enough information to recognize the differential paths of the risers and fallers, or to establish that the high-ranked tend to only fluctuate around the upper part of the wealth distribution throughout their lives. In this sense, our results complement the extensive literature on wealth inequality and top wealth shares (Saez and Zucman 2016;Smith, Zidar, and Zwick 2022) and recent work on the dynamics of wealth for the wealthiest (Gomez 2023;Ozkan, Hubmer, Salgado, and Halvorsen 2023).…”

“…2 See Gomez (2023) for evidence from the Forbes 400 list and Ozkan, Hubmer, Salgado, and Halvorsen (2023) for evidence on the top 0.1 percent of Norwegian wealth holders. Quantitative analysis of the origins of the wealthiest individuals dates back to at least to Wedgwood (1929).…”

Wealth Inequality in a Low Rate Environment

“…Finally, the idea that low interest rates increase top wealth inequality complements a growing literature, which argues that high inequality puts downward pressure on required rates of return in equilibrium (see, for instance, Straub (2019) for the interest rate or Gollier (2001); Toda and Walsh (2019); Gomez (2016) for the equity risk premium). Taken together, this suggests that high wealth inequality and low required rates of return can be mutually reinforcing in the long-run, an idea we leave for future research.…”

“…One strand of the literature focuses on the role of the return on wealth for top individuals (Piketty (2015); Kuhn, Schularick, and Steins (2017); Moll, Rachel, and Restrepo (2022);Hubmer, Krusell, and Smith (2020)). 2 Another strand of the literature emphasizes the importance of return dispersion (Benhabib, Bisin, and Zhu (2011);Fagereng, Guiso, Malacrino, and Pistaferri (2020); Benhabib, Bisin, and Luo (2019); Bach, Calvet, and Sodini (2017); Gomez (2023); Atkeson and Irie (2022); Zheng (2019)). We show that a decline in the required return on wealth increases top wealth inequality through both these components: it increases the realized return of existing fortunes along the transition path (as in the first strand of papers) and the dispersion of their returns in the long-run (as in the second strand of papers).…”