Heterogeneity and Persistence in Returns to Wealth

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. 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. Terms of use: Documents inJEL-Codes: D310, D910, E210, E240, G110.

The Dynamics of Inequality

“…In Appendix E, we work out in detail the implications of our theoretical results for the dynamics of wealth inequality. As we discuss there, recent empirical work finds some support for both type and scale dependence in wealth dynamics (Bach, Calvet, and Sodini (2015), Fagereng, Guiso, Malacrino, and Pistaferri (2016)). A clear priority for future research is empirical evidence, in combination with quantitative theory, that allows for an assessment of various concrete economic mechanisms put forth in the public debate.…”

Genetic Endowments and Wealth Inequality

“…1 A new wave of theoretical work argues that cross-sectional heterogeneity in the returns to wealth is required to match the basic features of the wealth distribution (Benhabib, Bisin, and Zhu, 2011;Benhabib and Bisin, 2016). This argument is supported by a growing empirical literature that finds substantial heterogeneity in such returns (Fagereng et al, 2016;Benhabib, Bisin, and Luo, 2015;Bach, Thiemann, and Zucco, 2015). Much of this heterogeneity persists over time, with some individuals earning consistently higher returns to wealth (Fagereng et al, 2016).…”

“…This argument is supported by a growing empirical literature that finds substantial heterogeneity in such returns (Fagereng et al, 2016;Benhabib, Bisin, and Luo, 2015;Bach, Thiemann, and Zucco, 2015). Much of this heterogeneity persists over time, with some individuals earning consistently higher returns to wealth (Fagereng et al, 2016). 2 Despite its theoretical and empirical importance, little is known about what drives such persistence.…”

Time Discounting and Wealth Inequality

“…The work by Augenblick et al (2015) and Andreoni et al (2018) suggests that present bias is more prevalent in experiments in which individuals make intertemporal choices on "bads" (such as effort). budget line may also vary across savers because some individuals are better at obtaining high returns on financial assets, as indicated by recent evidence (Fagereng et al 2018). Therefore, we also control for historical asset ownership and returns.…”