Edward Conard

Top Ten New York Times Bestselling Author

  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

AI Summary. Analysis of 20 years of Norwegian tax data finds substantial variation in individual returns to wealth, with a 180 basis point gap in median returns between the 10th and 90th wealth percentiles and an average return on overall wealth of 3.7%. Returns remain heterogeneous within asset classes and are positively correlated with wealth.

Andreas Fagereng, Luigi Guiso, Davide Malacrino and Luigi Pistaferri National Bureau Of Economic Research
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Norwegian tax data reveals significant heterogeneity in individual returns to wealth, with a 180 basis point difference in median returns btw the 10th and 90th wealth percentiles.

Do returns to wealth vary widely across households and rise with wealth?

Core argument: Twenty years of Norwegian tax data show a 180 basis point gap in median returns to wealth between the 10th and 90th wealth percentiles, with average returns on overall wealth of 3.7% and a standard deviation of 6.1%.

Analyzing 20 years of Norwegian tax data reveals significant heterogeneity in individual returns to wealth, with a 180 basis point difference in median returns between the 10th and 90th wealth percentiles. This disparity is not solely due to differences in asset allocation between risky and safe investments, as returns remain heterogeneous even within asset classes. Returns are positively correlated with wealth, and this correlation is largely driven by individuals with permanently higher returns being wealthier. For those below the 95th percentile, this correlation is mainly due to fixed effects, while for those above, it reflects compensation for higher risk exposure. The average return on overall wealth is 3.7%, with a standard deviation of 6.1%, indicating substantial variation across households.

Takeaways by Macro Roundup® AI

  1. Twenty years of Norwegian tax data show a 180 basis point gap in median returns to wealth between the 10th and 90th wealth percentiles, with average returns on overall wealth of 3.7% and a standard deviation of 6.1%.
  2. Return heterogeneity persists within asset classes rather than stemming solely from differences in allocation between risky and safe investments, according to the Norwegian tax data.
  3. Returns correlate positively with wealth largely because individuals with permanently higher returns are wealthier, a correlation attributed to fixed effects below the 95th percentile and to compensation for higher risk exposure above it.

“…We provide a systematic analysis of the properties of individual returns to wealth using twenty years of population data from Norway’s administrative tax records. We document a number of novel results. First, 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. Second, 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.Third, returns are positively correlated with wealth. Fourth, returns have an individual permanent component that accounts for 60% of the explained variation. Fifth, 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.…returns to wealth exhibit substantial heterogeneity. For example, in the last year of our sample (2013)‚ the (value-weighted) average return on overall wealth is 3.7%, but it varies considerably across households (standard deviation 6.1%). Furthermore, heterogeneity in returns is not simply a reflection of differences in portfolio allocations between risky and safe assets, and thereby compensation for risk-taking that mirrors heterogeneity in risk tolerance. Even conditioning on the share of risky assets in a portfolio, heterogeneity in returns is large and increases with the level of wealth. This result is confirmed even when looking at individuals with no private business wealth. Another remarkable finding is that asset returns increase with wealth. In 2013, the difference between the median return for people in the 90th and 10th percentiles of the wealth distribution is 180 basis points. The correlation between returns and wealth does not merely reflect risk-taking. We find that risk-adjusted measures of excess returns (the Sharpe ratio) increase with the level of wealth at the point of entry in the sample, before any investment decisions are taken…. We find that for wealth below the 95th percentile the correlation between average returns and wealth rank is largely due to a positive correlation between wealth and the fixed effects (individuals with permanently higher returns are wealthier). For wealth above the 95th percentile, it is largely driven by compensation for higher risk exposure among the wealthy, with a more limited contribution (one third) from the fixed effects….”

Andreas Fagereng, Luigi Guiso, Davide Malacrino and Luigi Pistaferri, “Heterogeneity In Returns To Wealth And The Measurement Of Wealth Inequality,” American Economic Review, May 2016, https://pubs.aeaweb.org/doi/pdf/10.1257/aer.p20161022

“…Individual returns average around 3 percent (2.43 percent at the median) and show substantial heterogeneity over the sample period. The standard deviation of individual returns ranges between 2.5 percent in 2009 and 6.1 percent in 2005. Similarly, the range (not shown) between the ninetieth and the tenth percentile varies, depending on the year, between 3.2 and 7.5 percentage points. Interestingly, the extent of heterogeneity first increases and then trends downward.5 Figure 2 shows that median returns increase with the household’s position in the wealth distribution. For example, households in the ninetieth percentile have median returns that are often twice as large as those of households in the tenth percentile, and the correlation with wealth also varies over time…”

Andreas Fagereng, Luigi Guiso, Davide Malacrino and Luigi Pistaferri, “Heterogeneity and Persistence In Returns To Wealth,” National Bureau Of Economic Research, November 2016, https://www.nber.org/papers/w22822.pdf

Ed Comment: I’m very skeptical of the conclusions. My experience is that almost all excess return comes from hidden (unaccounted-for) risks. For example, how do they account for liquidity risk, which probably adds 300 basis points of return for a given level of beta (correlation) risk (i.e. private equity outperforms public equity by 300 basis points for a given correlation with the market. My guess is that they don’t measure liquidity risk but that rich investors carry more illiquid assets to capture the 300 points (I do). Another example is duration risk. My guess is they don’t measure it. So I think more than showing the rich are savvy investors, it really just shows they are taking more risk, no surprise.

These are the second and third papers cited to support the proposition that the rich get higher returns. They overlap, but I found the data compelling. Both are using Norwegian data which documents both capital income and actual individual wealth stock, they looked at 1993-2013 so through two business cycles.

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