DP11635 Heterogeneity and Persistence in Returns to Wealth
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 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. 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.
