Heterogeneity in Returns to Wealth - Evidence from Swiss Administrative Data

Abstract

In this paper, we address how returns on financial assets vary across the population. Exploiting rich administrative data, we can neatly describe the heterogeneity across all parts of the distribution of wealth. We find compelling evidence that the rich benefit from higher returns. Likely, this is due to two different effects that have been called scale dependence and type dependence. The former is due to an observed positive correlation between net worth and returns. The latter describes a high persistence of returns for each individual, most possibly due to better information and market access advantages. In our first set of results, we find evidence that both channels play an essential role. Conceptually, this paper contributes by investigating the interaction of type and scale dependence. As returns are persistent, we identify low and high-type investors across the distribution of returns. Thus, modeling the latter allows us to document the scale dependence for many different types. We find that net worth has a larger positive effect on returns for high types, highlighting a previously undocumented channel through which wealth inequality reinforces itself.

Keywords: Wealth Inequality, Returns to Wealth, Financial Wealth, Net Worth, Heterogeneity, Portfolio Choice

JEL Classification: C21, D31, E21, G11, G51