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Heterogeneity and Persistence in Returns to Wealth

Author

Listed:
  • 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.

Suggested Citation

  • Andreas Fagereng & Luigi Guiso & Davide Malacrino & Luigi Pistaferri, 2016. "Heterogeneity and Persistence in Returns to Wealth," NBER Working Papers 22822, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22822 Note: EFG
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    Cited by:

    1. Per Krusell & Anthony Smith & Joachim Hubmer, 2015. "The historical evolution of the wealth distribution: A quantitative-theoretic investigation," 2015 Meeting Papers 1406, Society for Economic Dynamics.
    2. Ghent, Andra C. & Kudlyak, Marianna, 2015. "Intergenerational Linkages in Household Credit," Working Paper 15-14, Federal Reserve Bank of Richmond.
    3. Corneo, Giacomo, 2017. "Ein Staatsfonds, der eine soziale Dividende finanziert," Discussion Papers 2017/13, Free University Berlin, School of Business & Economics.
    4. repec:red:issued:16-340 is not listed on IDEAS
    5. Mariacristina De Nardi & Giulio Fella, 2017. "Saving and Wealth Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 280-300, October.
    6. Knüpfer, Samuli & Rantapuska, Elias & Sarvimäki, Matti, 2017. "Why does portfolio choice correlate across generations," Research Discussion Papers 25/2017, Bank of Finland.
    7. Shuhei Aoki & Makoto Nirei, 2014. "Zipf’s Law, Pareto’s Law, and the Evolution of Top Incomes in the U.S," UTokyo Price Project Working Paper Series 023, University of Tokyo, Graduate School of Economics.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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