Heterogeneity in Returns to Wealth - Evidence from Swiss Administrative Data

Abstract

In this paper we address how returns on financial assets vary across the population. Exploiting rich administrative data, we are able to neatly describe the heterogeneity across all parts of the distribution of wealth. We find compelling evidence that the rich benefit from higher returns. Likely, this is due to two different effects that have been called scale dependence and type dependence. The former is due to an observed positive correlation between net worth and returns. The latter describes a high persistence of returns for each individual, most possibly due to better information and market access advantages. We find evidence that both channels play an important role. Further, with respect to inequality, our results suggest that there is a wide heterogeneity across different socio-demographic dimensions in Switzerland which has been growing over time. Conceptually, this paper contributes by modelling the full distribution of returns. This allows to address the scale effect of net worth on the returns throughout the distribution of the latter. We find that net worth crucially determines the top of the return’s distribution highlighting another channel through which wealth inequality reinforces itself.