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.
Bibliographical noteFunding 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.
- Investment talent
- Market efficiency
- Wealth distribution