Heterogeneity and Persistence in Returns to Wealth

IMF Working Papers, July 27, 2018

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Heterogeneity and Persistence in Returns to Wealth

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Bibliographic details

• Authors: Andreas Fagereng, Luigi Guiso, Davide Malacrino, Luigi Pistaferri
• Published: July 27, 2018
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484370063.001

Summary

• Systematic analysis of individual returns to wealth using twelve years of population data from Norway’s administrative tax records.
• Documents novel results on the distribution, determinants, and persistence of wealth returns and discusses implications for the wealth inequality debate.

Key findings on heterogeneity

• Individuals earn markedly different average returns:
  • Financial assets: a standard deviation of 14%.
  • Net worth: a standard deviation of 8%.
• Heterogeneity in returns is not solely due to asset-allocation between safe and risky assets:
  • Returns are heterogeneous even within asset classes.
• Returns are positively correlated with wealth:
  • Moving from the 10th to the 90th percentile of the financial wealth distribution increases the return by 3 percentage points.
  • The same exercise for return to net worth increases the return by 17 percentage points.

Persistence and mechanisms

• Wealth returns exhibit substantial persistence over time.
• The observed persistence partly reflects:
  • Stable differences in risk exposure.
  • Asset scale differences.
• The observed persistence also reflects:
  • Persistent heterogeneity in sophistication and financial information.
  • Entrepreneurial talent.

Intergenerational correlation

• Wealth returns are (mildly) correlated across generations.

Implications for policy and the wealth inequality debate

• Heterogeneous and persistent returns to wealth imply that differences in returns across individuals and generations can amplify wealth concentration.
• Policy considerations arising from findings include addressing:
  • Information and sophistication gaps in financial markets.
  • Barriers to entrepreneurial activity and scaling.
  • Channels through which higher returns at higher wealth percentiles feed into long-run inequality dynamics.

By Andreas Fagereng, Luigi Guiso, Davide Malacrino, and Luigi Pistaferri; July 27, 2018 — IMF Working Paper.

Content in this bundle

• Heterogeneity and Persistence in Returns to Wealth, WP/18/171, July 2018
  • Heterogeneity and Persistence in Returns to Wealth, WP/18/171, July 2018 (Markdown version)
  • Heterogeneity and Persistence in Returns to Wealth, WP/18/171, July 2018 (PDF)