Differential Rates of Return and Racial Wealth Inequality

Luke Petach and Daniele Tavani

Journal of Economics, Race, and Policy, 2021, vol. 4, issue 3, No 2, 115-165

Abstract: Abstract Using data on household balance sheets from the Survey of Consumer Finances and data on macroeconomic rates of return from Jordà et al. (Q J Econ. 134(3):1225–1298, 2019) we construct two alternative series for household rates of return by race from 1989 to 2016. Our estimates suggest a persistent racial gap in the rate of return on assets between 1 and 4 percentage points. The gap in returns remains even after conditioning on demographic factors, labor market factors, credit history, portfolio composition, household attitudes toward savings, financial literacy, and inheritance—suggestive of a role for discrimination. Recentered influence function (RIF) decompositions indicate between 40 and 53%—1.2 to 1.6 percentage points—of the difference in median returns between Black and White households is unexplained by observable characteristics. A standard Oaxaca-Blinder decomposition suggests that differential rates of return can explain up to 14% of the racial wealth gap at the mean. Finally, our data on differential rates of return allow us to effectively rule out explanations for the racial wealth gap based on myopia or excessive time preference. Given observed series for consumption and rates of return, a standard lifecycle model requires Black households to discount the future less than White households in order to match the data.

Keywords: Rates of return; Racial wealth inequality; Stratification economics (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s41996-021-00085-2

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