Heterogeneity and Persistence in Returns to Wealth

Abstract

We provide a systematic analysis of the properties of individual returns to wealth using twelve years of population data from Norway's administrative tax records. We document a number of novel results. First, during our sample period individuals earn markedly different average returns on their financial assets (a standard deviation of 14%) and on their net worth (a standard deviation of 8%). Second, heterogeneity in returns does not arise merely from differences in the allocation of wealth between safe and risky assets: returns are heterogeneous even within asset classes. Third, returns are positively correlated with wealth: moving from the 10th to the 90th percentile of the financial wealth distribution increases the return by 3 percentage points-and by 17 percentage points when the same exercise is performed for the return to net worth. Fourth, wealth returns exhibit substantial persistence over time. We argue that while this persistence partly reflects stable differences in risk exposure and assets scale, it also reflects persistent heterogeneity in sophistication and financial information, as well as entrepreneurial talent. Finally, wealth returns are (mildly) correlated across generations. We discuss the implications of these findings for several strands of the wealth inequality debate.

The College Wealth Divide: Education and Inequality in America, 1956-2016

“…Finally, Figure 16D shows the proxy for returns to financial wealth by business ownership status instead of education. We find that business owners earn slightly higher returns on their nonbusiness wealth as well, in line with the hypothesis of Fagereng et al (2018) that entrepreneurs' "talent to manage and organize their business" (p. 5) enables them to generate higher returns in general. 8 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 Bottom 50% 5 0−90% T op 10%…”

“…For instance, college households might be savvier in picking investments with high returns or low fees. Fagereng et al (2018) demonstrate that persons with higher levels of education, and especially those with an economics-related college degree, earn higher returns on their wealth and financial assets even conditional on portfolio composition. This suggests that our estimate of the effect of differential asset price exposure from Section 4 might be conservative, given that we applied the average rate of return on stocks for all households.…”

“…Apart from financial savvy, Fagereng et al (2018) also point to entrepreneurial skills as a source of differential returns. Moreover, borrowing constraints can induce entrepreneurs to save substantial amounts and thus become very wealthy (Cagetti and De Nardi, 2006).…”

“…Consistently, the share of business owners in the SCF+ is higher among college households than among noncollege households in all waves (and conversely, the share of college households is disproportionately high among business owners). Fagereng et al (2018) use administrative individual-level data from Norway to construct a measure of returns to financial wealth. To this end, they add income from safe and risky assets and divide it by the average stock of financial and business assets.…”

“…Given that financial knowledge helps to earn higher returns on savings, this creates different incentives to invest in financial literacy.13 The corresponding share for the question on interest compounding are 86 percent and 73 percent, respectively, and for the question on real interest rates 86.7 percent and 72.9 percent, respectively.14 They consider the following income components: interest income earned on bank deposits and bond yields, yields from risky assets held abroad and outstanding claims and receivables, yields from mutual funds, yields from directly held listed shares (dividends and accrued capital gains), and yields from all private equity holdings (distributed dividends and the individual share of retained profits). Financial wealth includes bank deposits, money market funds, bond mutual funds, government and corporate bonds, stocks and mutual fund shares, the value of shares in private businesses and other unlisted shares, and the value of risky assets held abroad and of outstanding claims and receivables.15Fagereng et al (2018) also construct a proxy for returns to net worth. As this measure requires information on interest payments on all debt, which is so far neither included in the SCF+ nor the readily available extracts of the modern SCF, we decided to focus on returns to financial and business wealth.…”