Wealth Accumulation and Factors Accounting for Success

Identifying factors that help households to move upwards in their net worth
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This paper identifies and analyzes factors underlying success in achieving upward mobility in the distribution of net worth. It constructs income, balance sheet, and cash flow statements for households in a market economy. It also uses contributions from economic theory.

The study reveals that wealth inequality is decreasing over time and many households work their way out of poverty and lower wealth. Findings indicate that:

  • This mobility is largely due to savings rather than incoming gifts and remittances;
  • Return on assets (ROA) plays a larger role than savings rate;
  • ROA is positively correlated with higher education of household members, younger age of the head, higher debt/asset ratio and lower initial wealth;
  • Financial system imperfectly channels resources to productive and poor households.

The study contradicts the common assumption that successful entrepreneurs are those that simply get lucky. The savings rate is higher for those households with high and persistent ROA, consistent with some micro founded macro models with imperfect credit markets. High ROA households save by investing in their own enterprises and adopt consistent financial strategies for smoothing fluctuations.

About this Publication

By Pawasutipaisita, A., Townsend, R.