Why Are the Wealthiest So Wealthy?

Serdar Ozkan (University of Toronto)

Paper joint with Elin Halvorsen, Joachim Hubmer, and Sergio Salgado


We use administrative panel data from Norway between 1993 and 2015 on wealth and income to study lifecycle wealth dynamics.We find strong persistence at the top of the wealth distribution: the wealthiest start their lives significantly richer than other households in the same cohort, invest mostly in private equity, earn higher returns, and derive most of their income from dividends and capital gains. Inheritances and inter vivos transfers constitute a small fraction of the lifetime resources for most households except for a few wealthy ones who, in general, receive these funds earlier in life and in the form of private equity. There is significant heterogeneity among the wealthiest: A large fraction starts with relatively poor but experience rapid wealth growth early in life due to high rates of return. We then develop and estimate an overlapping generations model with rich heterogeneity. We find that the interaction between inheritance and rate of return heterogeneity is key for understanding wealth inequality in the cross-section and over the life cycle. Our counterfactual analysis suggests that a tax on inheritances reduces wealth inequality but has a detrimental effect on output and wages.