Heterogeneity and Persistence in Returns to Wealth

Abstract:

Heterogeneity, persistence, and correlation with wealth of individuals’ returns to savings are key to explain wealth concentration at the top. We provide the first systematic analysis of the properties of individual returns to wealth using twenty years of population data for Norway. The data consist of information on income from capital and asset values from administrative tax records. We establish a number of novel results. First, in a given cross section individuals earn markedly different returns on their assets, with a range of over 500 basis points between the 10th and the 90th percentile. Second, heterogeneity in returns does not arise because of differences in how people allocate their wealth between safe and risky assets. Indeed, returns are heterogeneous even within asset classes. Third, returns are positively correlated with wealth. Fourth, individual returns have a persistent component that explains almost 20% of the variation. Fifth, permanent differences in individual returns reflect differences in initial wealth, level and type of education, as well as access to private equity investment. Sixth, the fixed component of the return to wealth is also (mildly) correlated across generations. Finally, there is assortative mating in returns. We discuss the implications of these findings for the debate about the drivers of wealth concentration, its measurement, and the relation between income and wealth inequality.