James B. Davies (Department of Economics, University of Western Ontario, London N6A 5C2, Canada), &
Anthony F. Shorrocks (Department of Economics, University of Essex, Colchester CO4 3SQ, UK)
This chapter surveys what is known about the distribution of personal wealth and its evolution over time. We review the descriptive evidence as well as theoretical and applied research that attempts to explain the main features of wealth-holdings and wealth inequality observed in the real world.
There are many reasons for interest in personal wealth, and many ways in which the concept of wealth may be defined. If we were concerned with the overall distribution of economic well-being or resources, it would be appropriate to examine the distribution of “total wealth”, that is, human plus non-human capital. But that is not our objective here. Instead, we exclude the human capital component and focus on material assets in the form of real property and financial claims. The term “wealth” will therefore usually refer to “net worth” — the value of non-human assets minus debts. Our aim is to examine the reasons for holding wealth, to document the observed differences in holdings across individuals and families, and to examine the causes of these observed differences.
The concept of net worth may appear to be straightforward, but should we deal with intangible assets which cannot be readily bought and sold? This category covers pension rights, life insurance, and entitlement to future government transfers (including “social security wealth”). Any attempt to include the rights to uncertain future benefits has to confront a variety of difficult valuation problems. For example, it is not obvious what discount rates should be used for these assets. Should they be risk-adjusted? Should a special adjustment be made for people who are borrowing constrained? Satisfactory answers to these questions require a considerable amount of painstaking work. It is therefore not surprising to discover that most applied work on wealth-holdings and wealth distribution confines itself to marketable wealth. When reviewing the empirical evidence, we use the term “augmented wealth” to refer to the broader concept which includes entitlements to future pension streams.
There are certain important “stylized facts” about the distribution of wealth which it is useful to highlight at the outset. These are:
1. Wealth is distributed less equally than labour income, total money income or consumption expenditure. While Gini coefficients in developed countries typically range between about 0.3 and 0.4 for income, they vary from about 0.5 to 0.9 for wealth. Other indicators reveal a similar picture. The estimated share of wealth held by the top 1 percent of individuals or families varies from about 15-35 percent, for example, whereas their income share is usually less than 10 percent.
2. Financial assets are less equally distributed than non-financial assets, at least when owner-occupied housing is the major component of non-financial assets. However, in countries where land value is especially important, the reverse may be true.
3. The distribution of inherited wealth is much more unequal than that of wealth in general.
4. In all age groups there is typically a group of individuals and families with very low net worth, and in a number of countries, including the United States, the majority havesurprisingly low financial assets at all ages.
5. Wealth inequality has, on the whole, trended downwards in the 20th century, although there have been interruptions and reversals, for example in the United States where wealth inequality has increased since the mid 1970s.
Possible explanations for these, and other, stylized facts will be investigated in this chapter. (...)