Heterogeneity and Persistence in Returns to Wealth (NBER WP Version)
with A. Fagereng, L. Guiso and L. Pistaferri
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. We discuss the implications of these findings for several strands of the wealth inequality debate.
The Cyclicality of Employment Risk
with E. Blass-Hoffmann
We study how idiosyncratic earnings risk evolves over the business cycle in Italy and in the US. We distinguish between two sources of risk to annual earnings growth: changes in employment time (number of weeks of employment within a year) and changes in weekly earnings. Shocks to employment generate the tail distribution of annual earnings growth and account for the increased risk in recessions. In particular, an increase in the rate of separation and a decrease in the rate of hiring are responsible for the skewed annual earnings growth distribution observed in recessions. In contrast, the cross-sectional distribution of weekly earnings growth is relatively stable over the business cycle and exhibits little skewness. Thus, models that rely on cyclical idiosyncratic risk, should focus on cyclical employment risk rather than on cyclical wage risk.
Inventors’ Mobility and R&D Spillovers Across Firms
with P. Tebaldi (Current version: August 2014)
R&D spillovers across firms have long been seen as a cause for faster innovation, with positive effects on productivity and growth (Griliches , Bernstein and Nadiri [1988, 1989], Romer ). Does inventors' mobility increase these spillovers? To answer this question we develop two alternative statistical tests. We exploit the time variation in patents' citations and transfers of inventors between Californian firms in the period 1980-2008. Our results provide strong evidence that, following the move of one inventor from one firm to another, the R&D activities of the two firms become more interconnected. (on SSRN)
Time to completion and labor market outcomes: Does the early bird really get the worm?
with R. Saggio (Current version: September 2016)
This paper investigates how time to college completion affects subsequent labor market outcomes. We use a recent reform in which the Italian government consolidated the teaching offer in all universities in an attempt to decrease time to graduation. The reform was successful in reducing the proportion of students graduating late from a second level degree, but worsened a variety of post-graduation outcomes including earnings. Using this policy change as an instrumental variable, we find that late graduation is associated with better after graduation labor market
outcomes. To disentangle the human capital effect of late graduation from working experience accumulated while still in college, we use revealed preferences restrictions on a student choice model. We believe that our findings have implications for the current policy debate as national governments are increasingly investing in public programs explicitly aimed at reducing time to graduation. (Link to slides)
Entrepreneurs’ Wealth and Firm Dynamics
Owners of privately-held firms typically invest a large amount of their personal wealth into their firm. In principle, the wealth not invested in the firm may be used as a buffer to smooth shocks to the firm. Is such buffer stock behavior observed among privately-held firm owners? Does such buffer stock behavior affect the firm's performance? To address these questions, we use matched employer-employee data, together with information on the assets held by every shareholder of every Norwegian firm from 2004 to 2013. We document three facts: (1) Wealthy entrepreneurs start larger businesses and in sectors that require high initial capital investment. (2) Entrepreneur’s private wealth improves firm performance, lowers the exit rate, and increases profitability. (3) Firms owned by wealthy shareholders are less sensitive to revenue and value added shocks in many dimensions. Specifically, at the top of the owner’s wealth distribution, survival rate, employment growth and employees' wage growth react less to the shocks than at the bottom. We discuss a model of the firm with costly external financing that rationalizes our results.
Heterogeneity in Returns to Wealth and the Measurement of Wealth Inequality,
with A. Fagereng, L. Guiso, and L. Pistaferri, American Economic Review P&P, 2016
Lacking a long time series on the assets of the very wealthy, Saez and Zucman (2015) use US tax records to obtain estimates of wealth holdings by capitalizing asset income from tax returns. They document marked upward trends in wealth concentration. We use data on tax returns and actual wealth holdings from tax records for the whole Norwegian population to test the robustness of the methodology. We document that measures of wealth based on the capitalization approach can lead to misleading conclusions about the level and the dynamics of wealth inequality if returns are heterogeneous and even moderately correlated with wealth.