Cyclical transactions and wealth inequality

Arbeitspapier

Wealth is distributed more unevenly than income, and one contributing factor might be that richer households earn higher portfolio returns. I uncover one channel that causes portfolio returns to be increasing in wealth: Poorer households consistently buy risky assets in booms-when expected returns are low-and sell after a bust-when expected returns are high. Although time-varying expected returns are a robust empirical fact, theories are ambiguous on whether poorer or richer households engage in such cyclical trading patterns. I estimate the trading patterns for households across wealth levels, in the US housing market for 1988-2013. I interact housing ownership patterns from deeds records with household-level wealth, which I infer from merging owners' surnames with their name-based income in the 1940 full Census. The estimated dispersion in expected returns from this "buy-high-sell-low" channel is large: The interquartile-range difference is 60 basis points per year. The channel predicts that geographies with historically higher volatility will feature more wealth inequality than income inequality: I verify this implication in the data. These results suggest that a government policy intended to boost poorer households' wealth via homeownership can backfire if it ignores the status of house prices.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. WP 2022-05

Classification and Topics

• Classification: Wirtschaft ; Intertemporal Household Choice; Life Cycle Models and Saving ; Personal Income, Wealth, and Their Distributions ; Business Fluctuations; Cycles ; Portfolio Choice; Investment Decisions ; Urban, Rural, Regional, Real Estate, and Transportation Economics: Housing Demand
• Subject: Wealth inequality ; business cycles ; real estate asset ; timing of transaction ; wealth return

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Sakong, Jung
• Event: Veröffentlichung
• (who): Federal Reserve Bank of Chicago
• (where): Chicago, IL
• (when): 2022

Further information

• DOI: doi:10.21033/wp-2022-05
• Handle: http://hdl.handle.net/10419/251015
• Last update: 10.03.2025, 11:41 AM CET