Why Are the Wealthiest So Wealthy? New Longitudinal Empirical Evidence and Implications for Theories of Wealth Inequality 

70 Pages Posted: 23 Feb 2023 Last revised: 8 Jun 2024

See all articles by Serdar Ozkan

Serdar Ozkan

Federal Reserve Banks - Federal Reserve Bank of St. Louis; University of Toronto

Joachim Hubmer

University of Pennsylvania - Department of Economics

Sergio Salgado

The Wharton School, University of Pennsylvania

Elin Halvorsen

Statistics Norway - Research Department; University of Oslo - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 9, 2023

Abstract

We use 1993-2015 Norwegian administrative panel data on wealth and income to study lifecycle wealth dynamics. By employing a novel budget constraint approach, we show that at age 50 the excess wealth of the top 0.1%, relative to mid-wealth households, is accounted for by higher saving rates (38%), inheritances (34%), returns (23%), and labor income (5%). One-fourth of the wealthiest-the "New Money"-start with negative wealth but experience rapid wealth growth early in life. Relative to the "Old Money," the New Money are characterized by even higher saving rates, returns, and labor income. We use these dynamic facts to test six commonly used models of wealth inequality. Although these models can generate the high concentration of wealth seen in the cross-section, they tend to put too much weight on (accidental) bequests and fail to capture the contribution of the New Money. A model with heterogeneous returns that decrease in wealth, and non-homothetic preferences is consistent with the new facts on the dynamics of wealth accumulation.

Keywords: Wealth inequality, lifecycle wealth dynamics, rate of return heterogeneity, bequests, saving rate heterogeneity JEL codes: D14, D15, E21

Suggested Citation

Ozkan, Serdar and Hubmer, Joachim and Salgado, Sergio and Halvorsen, Elin, Why Are the Wealthiest So Wealthy? New Longitudinal Empirical Evidence and Implications for Theories of Wealth Inequality  (March 9, 2023). Available at SSRN: https://ssrn.com/abstract=4362818 or http://dx.doi.org/10.2139/ssrn.4362818

Serdar Ozkan

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

University of Toronto ( email )

105 St George Street
Toronto, Ontario M5S 3G8
Canada

Joachim Hubmer

University of Pennsylvania - Department of Economics ( email )

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

Sergio Salgado (Contact Author)

The Wharton School, University of Pennsylvania ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

HOME PAGE: http://https://sergiosalgadoi.wordpress.com/

Elin Halvorsen

Statistics Norway - Research Department ( email )

Akersveien 26
Postboks 2633 St. Hanshaugen
Oslo, Oslo 0131
Norway

University of Oslo - Department of Economics

Norway

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