Why Are the Wealthiest So Wealthy? An Empirical-Quantitative Investigation of Lifecycle Wealth Dynamics " with Elin Halvorsen, Joachim Hubmer, and Sergio Salgado

 Abstract: 

The earlier literature studied wealth inequality primarily using cross-sectional data, which does not allow for an empirical investigation of the dynamics of wealth accumulation. In this paper, we use Norwegian administrative panel data between 1993 and 2015 on wealth and income to study lifecycle wealth dynamics. We empirically and quantitatively investigate the roles of heterogeneity in lifetime incomes, inheritances, rates of returns and savings in wealth inequality, with a focus on the wealthiest. Our empirical results reveal that, on average, the wealthiest start their lives richer relative to their peers, invest more in private equity, earn higher returns, and save at higher rates. We then zoom in on them and find large within-group heterogeneity: A large fraction starts relatively poor with little private equity in their portfolios but experiences rapid wealth growth early in life due to much higher rates of return. Furthermore, the lifetime incomes of the wealthy are mainly derived from dividends and capital gains from equity, whereas in the rest of the population labor income is the main source. Inheritances and inter vivos constitute a negligible fraction of lifetime resources for most households but are an important determinant of wealth for a few at the top of the distribution. With these facts on hand, we then develop and estimate an  overlapping generations model with rich heterogeneity in bequests, labor income and entrepreneurial ability, which households inherit from their parents imperfectly. We find that inheritance and rate of return heterogeneity, and in particular their positive correlation are key for understanding top wealth inequality.