Sergio Salgado, University of Pennsylvania

“Why Are the Wealthiest So Wealthy?”

Coautoreado con Elin Halvorsen, Joachim Hubmer y Serdar Ozkan

Abstract: The earlier literature studied wealth inequality using cross-sectional data, which does not allow for an empirical investigation of the dynamics of wealth accumulation. In this paper, we use Norwegian administrative panel data on wealth and income to study wealth accumulation over the life cycle. We empirically and quantitatively investigate the roles of heterogeneity in rates of returns, saving rates, lifetime incomes, and inheritances as well as ex-post luck in top wealth inequality. We first document the salient features of life-cycle wealth dynamics of different wealth groups by investigating their past and future evolution of wealth, asset portfolios, labor income, saving rates, and rates of returns. We find that the wealthiest households inherit substantial wealth from their parents and enjoy higher rates of return and labor income growth over their life cycle. Furthermore, wealth changes display high excess kurtosis and positive skewness, especially for wealthy households, suggesting sudden jumps in wealth. Based on these facts, we then develop and estimate a structural overlapping generations model with heterogeneity in labor market efficiency, entrepreneurial ability, and discount factors. We use this model to quantify the importance of different factors in top wealth inequality. Our preliminary results suggest that inheritances, rates of return, lifetime labor income, and in particular their positive correlation, are key for understanding top wealth inequality.