## How the Rich Get Richer

_IMF Blog, November 30, 2020_

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**Canonical URL:** [How the Rich Get Richer](https://www.imf.org/en/blogs/articles/2020/11/30/how-the-rich-get-richer)

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## Bibliographic details
- Authors: Davide Malacrino
- Published: November 30, 2020

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### Data and empirical setting
- Analysis uses 12-years of tax records (2004-2015) from Norway.
- Norway's wealth tax requires assets to be reported by employers, banks and other third parties, reducing errors from self-reporting.
- The data make it possible to match parents with their children, enabling intergenerational analysis.

### Key empirical findings
- Wealthier people earn higher returns on their investments.
- An individual in the 75th percentile of wealth distribution who invested $1 in 2004 would have yielded $1.50 by the end of 2015—a return of 50 percent.
- A person in the top 0.1 percent would have yielded $2.40 on the same invested dollar—a return of 140 percent.
- Moving from the 10th percentile to 90th percentile of wealth distribution increases the probability of making it to the top 1 percent by 1.2 percentage points compared to an average probability of 0.89 percent.
- High returns both bring individuals to the top of the wealth scale and prevent them from leaving it.

### Mechanisms behind higher returns for the wealthy
- Conventional explanation: richer individuals put more of their assets toward high risk investments, which can result in higher returns.
- New finding: wealthy people often earn a higher return even on more conservative investments—evidence of pure “returns to scale” to wealth.
- Possible reasons for higher risk-adjusted returns at given portfolio allocations:
  - Access to exclusive investment opportunities.
  - Access to better wealth managers.
  - Greater financial sophistication.
  - Better financial information.
  - Entrepreneurial talent.
- These characteristics make the returns to wealth persistent over time.
- The research is the first to quantify this mechanism and show that it is likely to matter empirically.

### Intergenerational dynamics
- Wealth has a high degree of intergenerational correlation.
- Children of the richest are likely to be very rich, but are unlikely to get as high returns from this wealth as their parents did.
- Implication: money is perfectly inheritable, but exceptional talent (which contributes to exceptionally high returns) is not necessarily transmitted across generations.

*Source: IMF Blog — How the Rich Get Richer (Davide Malacrino, November 30, 2020).*

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_Source: https://www.imf.org/en/blogs/articles/2020/11/30/how-the-rich-get-richer_