Wealth Inequality in the US: the Role of Heterogeneous Returns

47 Pages Posted: 3 Sep 2021

See all articles by Inês Xavier

Inês Xavier

Board of Governors of the Federal Reserve System

Date Written: June 23, 2021

Abstract

Why is wealth so concentrated in the United States? In this paper, I investigate the role of return heterogeneity as a source of wealth inequality. Using household-level data from the Survey of Consumer Finances (1989-2019), I provide new empirical evidence on returns to wealth in the United States, and find that wealthier households earn, on average, higher returns: moving from the 20th to the 99th percentile of the wealth distribution raises the average yearly return from 3.6% to 8.3%. To understand how these return differences shape the distribution of wealth, I introduce realistic return heterogeneity in a partial equilibrium model of household saving behavior. This exercise suggests that considering both earnings and return heterogeneity can fully account for the top 10% wealth share observed in the data (76%), which cannot be explained by earnings differences alone.

Keywords: Wealth inequality, returns to wealth, heterogeneity, household finance

Suggested Citation

Xavier, Inês, Wealth Inequality in the US: the Role of Heterogeneous Returns (June 23, 2021). Available at SSRN: https://ssrn.com/abstract=3915439 or http://dx.doi.org/10.2139/ssrn.3915439

Inês Xavier (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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