Working Paper: NBER ID: w22822
Authors: Andreas Fagereng; Luigi Guiso; Davide Malacrino; Luigi Pistaferri
Abstract: We provide a systematic analysis of the properties of individual returns to wealth using twenty years of population data from Norway’s administrative tax records. We document a number of novel results. First, in a given cross-section, individuals earn markedly different returns on their assets, with a difference of 500 basis points between the 10th and the 90th percentile. 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. Fourth, returns have an individual permanent component that accounts for 60% of the explained variation. Fifth, for wealth below the 95th percentile, the individual permanent component accounts for the bulk of the correlation between returns and wealth; the correlation at the top reflects both compensation for risk and the correlation of wealth with the individual permanent component. Finally, the permanent component of the return to wealth is also (mildly) correlated across generations. We discuss the implications of these findings for several strands of the wealth inequality debate.
Keywords: returns to wealth; wealth inequality; persistence; heterogeneity
JEL Codes: D14; D31; E21; E24; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Wealth (D31) | Returns to wealth (E21) |
| Individual permanent component (D10) | Returns to wealth (E21) |
| Individual characteristics (C29) | Returns to wealth (for wealth below 95th percentile) (D31) |
| Permanent component of returns (G12) | Returns to wealth (intergenerational correlation) (D15) |
| Returns to wealth (for wealth below 95th percentile) (D31) | Correlation with wealth (D31) |