Heterogeneity and Persistence in Returns to Wealth

60 Pages Posted: 14 Nov 2016

See all articles by Andreas Fagereng

Andreas Fagereng

Statistics Norway

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF)

Davide Malacrino

International Monetary Fund

Luigi Pistaferri

Stanford University; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 5 versions of this paper

Date Written: November 2016

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

Fagereng, Andreas and Guiso, Luigi and Malacrino, Davide and Pistaferri, Luigi, Heterogeneity and Persistence in Returns to Wealth (November 2016). NBER Working Paper No. w22822. Available at SSRN: https://ssrn.com/abstract=2868921

Andreas Fagereng (Contact Author)

Statistics Norway ( email )

Postboks 8131 Dep, 0033 Oslo
Oslo, Oslo 0033
Norway
+47 2109 4700 (Phone)

HOME PAGE: http://sites.google.com/site/andreasfagereng/

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Sallustiana 62
Rome, 00187
Italy
+39 06 4792 4858 (Phone)
+39 06 4792 4872 (Fax)

HOME PAGE: http://www.eief.it/faculty-visitors/faculty-a-z/luigi-guiso/

Davide Malacrino

International Monetary Fund ( email )

700 19th St NW
Washington, DC 20001
United States

Luigi Pistaferri

Stanford University ( email )

Stanford, CA 94305
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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