Must-Read: Andreas Fagereng et al.: Heterogeneity and Persistence in Returns to Wealth

Must-Read: Andreas Fagereng et al.: Heterogeneity and Persistence in Returns to Wealth: “Twenty years of population data from Norway’s administrative tax records [show]…

…in a given cross-section, individuals earn markedly different returns on their assets, with a difference of 500 basis points between the 10th and the 90th percentile…. Heterogeneity in returns does not arise merely from differences in the allocation of wealth between safe and risky assets: returns are heterogeneous even within asset classes…. Returns are positively correlated with wealth… have an individual permanent component that accounts for 60% of the explained variation….

For wealth below the 95th percentile, the individual permanent component accounts for the bulk of the correlation between returns and wealth; the correlation at the top reflects both compensation for risk and the correlation of wealth with the individual permanent component. Finally, the permanent component of the return to wealth is also (mildly) correlated across generations.