Do All Individuals Gain Equally in Capital Markets? Shedding Light on the Causes of Wealth Inequality

Over time and across countries, the distribution of wealth appears extremely unequal: a small fraction of the population controls a large (and growing) share of the economy's wealth. In the US, the richest 0.1% now control more than 20% of total asset values in the economy, more than a threefold increase over the last decades. In Norway, the same number is now well over 10%. Thus, understanding what causes wealth inequality is at the forefront of current academic and policy discussions. The answer to this question has traditionally been sought in inequality in returns to human capital, i.e. income inequality. Yet, even though inequality in income is high and rising, years of research have unambiguously shown that this cannot explain the massive inequality in wealth observed in the data. Recently, research has shifted attention to heterogeneity in returns to wealth (capital income) as a cause of wealth inequality. The project has looked into whether it is so that the return on capital in itself, can be an important factor to explain the increased inequality in wealth. Using highly detailed data over 12 years on income and wealth for the Norwegian population we have studied returns on capital and document a number of findings that are novel in the economic literature. The results show that the return on capital is both heterogeneous and persistent, different groups of the population have over time markedly higher returns than others. We also investigate whether richer households achieve higher returns on their investments. One possible explanation for such a finding could be that wealthier households can assume greater risk on their investments. However, even within asset classes such as stocks, private equity, housing wealth, bank deposits and household debt we find differences, both in the cross-section but also across the wealth distribution. Richer households obtain higher returns on their savings and also have lower debt service costs on their debt. The project also documents that returns are (mildly) correlated across generations, children of high return parents tend to have slightly higher returns themselves. The findings may play a major role in the debates regarding wealth inequality and intergenerational mobility, and to the discussion on optimal taxation of wealth and capital income.

Prosjektet har vært svært viktig for karriereutviklingen til prosjektdeltakerne Fagereng og Malacrino. Finansieringen muliggjorde samarbeide med Guiso og Pistaferri om artikkelen Heterogeneity and Persistence in Returns to Wealth, som vil være en viktig publikasjon for alle medforfatterne. Funnene i prosjektet har potensiale til å bidra i den pågående debatten (både den akademiske men også 'popular debate' i den pågående amerikanske valgkampen) om tilsynelatende økende formuesulikhet i ulike land. Kanskje spesielt når det kommer til hastigheten observert ulikhet beveger seg med og også til hva som er optimal beskatning i en økonomi (formuesskatt vs kapitalskatt vs skatt på arbeid). Resultatene er også potensielt viktige for å si noe om målefeil når man ønsker å anslå formuesulikhet i situasjoner der man ikke har komplette data (feks kun data på husholdningenes inntekter).

Over time and across countries, the distribution of wealth appears extremely unequal: a small fraction of the population controls a large (and growing) share of the economy's wealth. Thus, understanding what causes wealth inequality is at the forefront of current academic and policy discussions. The answer to this has traditionally been sought in inequality in returns to human capital, i.e. income inequality. Yet, despite the fact that inequality in income is high and rising, years of research have unambiguously shown that this cannot explain the massive inequality in wealth observed in the data. Addressing the latter requires very counterfactual differences in labor earning between top and median earners. Recently, research has shifted attention to heterogeneity in returns to wealth (capital income) as a cause of wealth inequality. Theoretical findings suggest that sufficient heterogeneity and persistence in returns to wealth, some across generations, can indeed result in very concentrated wealth distributions and dominate, as a cause of inequality in wealth, any inequality arising for heterogeneity in labor income. This is amplified if the wealthy are able to earn higher returns on their investments. This is a remarkable result which, if empirically true would call for a shift in focus from inequality in remuneration to labor to inequality in remuneration to capital. But how much return heterogeneity is there in the data and does it tend to persist? No systematic evidence is available to answer these questions. This project plans to provide a systematic characterization of the properties of returns to wealth that can answer these key questions and others relevant for wealth inequality, including the correlation between returns and wealth, the persistence in returns across generations and the presence of assortative mating in returns. We will use Norwegian data which are likely the only ones worldwide that can shed light on the properties of returns to wealth.