Why Are the Wealthiest So Wealthy? An Empirical-Quantitative Investigation of Lifecycle Wealth Dynamics

We use administrative panel data from Norway between 1993 and 2015 on wealth and income to study lifecycle wealth dynamics. Our empirical results reveal strong wealth persistence at the top of the distribution. On average, the wealthiest start their lives significantly richer than other households in the same cohort, invest more in private equity, earn higher returns, and derive most of their lifetime income from dividends and capital gains on equity. Inheritances 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 more in the form of private equity. We find significant heterogeneity among the wealthiest: A large fraction starts relatively poor with little private equity in their portfolios but experiences rapid wealth growth early in life due to high rates of return. We then develop and estimate an overlapping generations model with rich heterogeneity in inheritances, labor income, and entrepreneurial ability. 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.