Why Are the Wealthiest So Wealthy? New Longitudinal Empirical Evidence and Implications for Theories of Wealth Inequality

Elin Halvorsen (elin.halvorsen@ssb.no), Joachim Hubmer (jhubmer@sas.upenn.edu), Serdar Ozkan and Sergio Salgado Ibáñez
Additional contact information
Elin Halvorsen: https://www.ssb.no/en/forskning/ansatte/elin-halvorsen
Joachim Hubmer: https://economics.sas.upenn.edu/people/joachim-hubmer

No 2024-013, Working Papers from Federal Reserve Bank of St. Louis

Abstract: CORRECT ORDER OF AUTHORS: Hubmer, Halvorsen, Salgado, Ozkan. We use 1993--2015 Norwegian administrative panel data on wealth and income to study lifecycle wealth dynamics. By employing a novel budget constraint approach, we show that at age 50 the excess wealth of the top 0.1%, relative to mid-wealth households, is accounted for by higher saving rates (38%), inheritances (34%), returns (23%), and labor income (5%). One-fourth of the wealthiest---the "New Money"---start with negative wealth but experience rapid wealth growth early in life. Relative to the "Old Money," the New Money are characterized by even higher saving rates, returns, and labor income. We use these dynamic facts to test six commonly used models of wealth inequality. Although these models can generate the high concentration of wealth seen in the cross-section, they tend to put too much weight on (accidental) bequests and fail to capture the contribution of the New Money. A model with heterogeneous returns that decrease in wealth, and non-homothetic preferences is consistent with the new facts on the dynamics of wealth accumulation.

Keywords: wealth inequality; lifecycle wealth dynamics; rate of return heterogeneity; bequests; saving rate heterogeneity (search for similar items in EconPapers)
JEL-codes: D14 D15 E21 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2024-06-08
New Economics Papers: this item is included in nep-dge and nep-fdg
Note: A related working paper is 2023-004: https://doi.org/10.20955/wp.2023.004
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DOI: 10.20955/wp.2024.013

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