Return Heterogeneity vs. Participation: The Big Levers of Financial Wealth Inequality?

Household investment behavior shapes financial wealth inequality, yet the roles of return heterogeneity and risky asset participation remain insufficiently understood. This study examines their distributional effects using individual asset data from the DNB Household Survey and cross-country portfolio information from the Household Finance and Consumption Survey. Applying the Global Capital Asset Pricing Model, I find that returns do not systematically correlate with financial wealth in the Netherlands. Counterfactual simulations indicate that inequality remains stable under the Dutch status quo. However, rising returns or increased return heterogeneity amplify inequality, particularly if participation gaps persist. Broadening financial market participation mitigates these effects and reduces long-term uncertainty in wealth inequality trends. (Stone Center on Socio-Economic Inequality Working Paper)