Wealth Inequality in the US: The Role of Heterogeneous Returns

Wealth Inequality in the US: The Role of Heterogeneous Returns. Xavier, I. 2020. Unpublished manuscript

Why is wealth so concentrated in the United States? In this paper, I investigate the role of return heterogeneity as a source of wealth inequality. Using household-level data from the Survey of Consumer Finances (1989-2019), I provide new empirical evidence on returns to wealth in the United States, and find that wealthier households earn, on average, higher returns: moving from the 20th to the 99th percentile of the wealth distribution raises the average yearly return from 3.6% to 8.3%. To understand how these return differences shape the distribution of wealth, I introduce realistic return heterogeneity in a partial equilibrium model of household saving behavior. This exercise suggests that considering both earnings and return heterogeneity can fully account for the top 10% wealth share observed in the data (76%), which cannot be explained by earnings differences alone.

@unpublished{Xavier2020,
  title = {Wealth Inequality in the {{US}}: The Role of Heterogeneous Returns},
  author = {Xavier, In{\^e}s},
  year = {2020},
  url = {https://www.inesxavier.com/research},
  abstract = {Why is wealth so concentrated in the United States? In this paper, I investigate the role of return heterogeneity as a source of wealth inequality. Using household-level data from the Survey of Consumer Finances (1989-2019), I provide new empirical evidence on returns to wealth in the United States, and find that wealthier households earn, on average, higher returns: moving from the 20th to the 99th percentile of the wealth distribution raises the average yearly return from 3.6\% to 8.3\%. To understand how these return differences shape the distribution of wealth, I introduce realistic return heterogeneity in a partial equilibrium model of household saving behavior. This exercise suggests that considering both earnings and return heterogeneity can fully account for the top 10\% wealth share observed in the data (76\%), which cannot be explained by earnings differences alone.},
  keywords = {Determinants of Wealth and Wealth Inequality},
  note = {Unpublished manuscript}
}

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