Heterogeneity and persistence in returns to wealth
Luigi Guiso, AXA Professor of Household Finance and Insurance, Einaudi Institute for Economics and Finance (EIEF)
Please join us for our upcoming finance seminar. Luigi Guiso, AXA Professor of Household Finance and Insurance, Einaudi Institute for Economics and Finance (EIEF), will be presenting.
University of Oxford staff and students are welcome to attend if seats are available. If you would like to attend please contact Marie van Boekel to check availability.
We provide a systematic analysis of the properties of individual returns to wealth using twenty years of population data from Norway’s administrative tax records. We document a number of novel results. First, in a given cross-section, individuals earn markedly different returns on their assets, with a difference of 500 basis points between the 10th and the 90th percentile. Second, heterogeneity in returns does not just arise 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. Fourth, returns have an individual permanent component that accounts for 60% of the explained variation. Fifth, for wealth below the 95th percentile, the individual permanent component accounts for the bulk of the correlation between returns and wealth; the correlation at the top reflects both compensation for risk and the correlation of wealth with the individual permanent component. Finally, the permanent component of the return to wealth is also (mildly) correlated across generations. We discuss the implications of these findings for several strands of the wealth inequality debate.