Wealth begets wealth. This simple concept of privilege is compounding frustration over the growing inequalities caused by the COVID-19 pandemic.
A paper co-authored this year by economists from the IMF and other institutions confirms that wealthier people have higher returns on their investments. It also shows that while the children of wealthy people are more likely to inherit their wealth, they do not necessarily receive the same high returns on their investments.
Detailed data on wealth is extremely rare, but Norway's 12 years of tax records (2004-2015) open new doors to the wealth accumulation of individuals and their descendants. The Nordic country has a wealth tax that requires reporting of assets by employers, banks and other third parties to reduce errors in self-reporting. Data released under certain conditions will also enable matching of parents and children.
Data shows that individuals aged 75th A percentile of the wealth distribution who invested $1 in 2004 would have earned $1.50 by the end of 2015. This is his 50% return. For a person in the top 0.1 percent, on the same invested dollar he would earn a profit of $2.40, which is a return of 140 percent.
Another important finding is that high returns both lift individuals to the top of the wealth scale and prevent them from leaving.Controlling for age, parental background, and income, transition begins at age 10th Percentile up to 90th A percentile of the wealth distribution increases the probability of being in the top 1 percent by 1.2 percentage points compared to the average probability of 0.89 percent.
Why do the rich earn high profits? Conventional wisdom holds that wealthy individuals put more of their assets into high-risk investments, which in turn generates higher returns. However, our research shows that wealthy individuals often earn higher returns on more conservative investments. Wealthier individuals enjoy pure “returns to scale” on their wealth. Specifically, for a given portfolio allocation, wealthier individuals are more likely to earn higher risk-adjusted returns, perhaps because they have access to exclusive investment opportunities or better wealth managers. Financial knowledge, financial intelligence, and entrepreneurial talent are also important. These characteristics provide lasting returns to your wealth over time. This study is the first to quantify this mechanism and demonstrate its potential empirical importance.
Will high yields persist across generations? The answer is conditionally yes. Although wealth is highly intergenerationally correlated, there are important differences in how returns to wealth are earned across generations. Children of the wealthiest families are likely to be very wealthy, but they are unlikely to benefit as much from that wealth as their parents. This suggests that money is fully inheritable, but great talent is not.
