Heterogeneity and Persistence in Returns to Wealth

By Andreas Fagereng, Luigi Guiso, Davide Malacrino, Luigi Pistaferri

July 27, 2018

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Andreas Fagereng, Luigi Guiso, Davide Malacrino, and Luigi Pistaferri. Heterogeneity and Persistence in Returns to Wealth, (USA: International Monetary Fund, 2018) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We provide a systematic analysis of the properties of individual returns to wealth using twelve years of population data from Norway’s administrative tax records. We document a number of novel results. First, during our sample period individuals earn markedly different average returns on their financial assets (a standard deviation of 14%) and on their net worth (a standard deviation of 8%). Second, heterogeneity in returns does not arise merely from differences in the allocation of wealth between safe and risky assets: returns are heterogeneous even within asset classes. Third, 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 - and by 17 percentage points when the same exercise is performed for the return to net worth. Fourth, wealth returns exhibit substantial persistence over time. We argue that while this persistence partly reflects stable differences in risk exposure and assets scale, it also reflects persistent heterogeneity in sophistication and financial information, as well as entrepreneurial talent. Finally, wealth returns are (mildly) correlated across generations. We discuss the implications of these findings for several strands of the wealth inequality debate.

Subject: Capital income, Financial institutions, Housing, Income, Income distribution, National accounts, Stocks

Keywords: Assets return, Book value, Capital income, Expected return, Financial wealth, Heterogeneity, Heterogeneity channel, Housing, Income, Income distribution, Intergenerational mobility, Long-term debt, Market value, Net worth, Portfolio return, Private equity, Return heterogeneity, Return on assets, Returns to wealth, Risk tolerance, Stocks, Wealth distribution, Wealth inequality, Wealth return regression, Wealth share, WP

Publication Details

Pages:

69
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/171
Stock No:

WPIEA2018171
ISBN:

9781484370063
ISSN:

1018-5941

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