Are rich people smarter?

Moshe Levy*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

47 Scopus citations

Abstract

We formulate a general stochastic process of wealth accumulation by capital investment and analyze the conditions required to ensure convergence to the empirically observed Pareto wealth distribution. While homogeneous investment talent leads to the Pareto distribution under very general conditions, even a mild degree of differential investment talent results in a non-Pareto wealth distribution. This finding suggests that chance, rather than differential investment talent, is the dominant factor in the process of wealth accumulation by financial investment. Our findings conform with market efficiency and may have implications regarding the origins, the economic significance, and the social desirability of wealth inequality at the high-wealth range.

Original languageAmerican English
Pages (from-to)42-64
Number of pages23
JournalJournal of Economic Theory
Volume110
Issue number1
DOIs
StatePublished - 1 May 2003

Bibliographical note

Funding Information:
I am grateful to Tony Bernardo, Michael Brennan, Victor Rı́os-Rull, Richard Roll, Eduardo Schwartz, Joel Slemrod, Sorin Solomon, Ed Wolff, and the anonymous referee for their valuable comments and suggestions. This study has been financially supported by the Zagagi Fund.

Keywords

  • Inequality
  • Investment talent
  • Market efficiency
  • Pareto
  • Wealth distribution

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