Magnus Irie

Job Market Paper
Innovations in Entrepreneurial Finance and Top Wealth Inequality  

How does improved entrepreneurial equity financing affect top wealth inequality? Three important forces are in play. On one hand, better risk sharing allows entrepreneurs to reduce the idiosyncratic volatility in their wealth portfolios. This risk reduction effect lowers wealth inequality by making extreme wealth trajectories less likely. On the other hand, better equity financing enables entrepreneurs to raise more capital and scale up. This scaling up effect raises top wealth inequality. In this paper, I show that which of these two countervailing effects dominates depends crucially on a third force: the general equilibrium reallocation effect. When this is strong, large amounts of capital are reallocated to entrepreneurs from other sectors of the economy. This eases the competitive pressures that arise when entrepreneurs want to scale up and allows them to scale up without reduced profitability. Empirically, several trends in U.S. data point to the strength of this reallocation effect. Most notable among these trends is the dramatic rise of venture capital-backed firms. The results suggest that improved entrepreneurial equity financing has been a quantitatively important contributor to rising wealth concentration.

Publications

Rapid Dynamics of Top Wealth Shares and Self-Made Fortunes: What Is the Role of Family Firms? (with Andrew Atkeson)

American Economic Review: Insights (2022)

We derive an analytical link between the fast dynamics of inequality at the top of the wealth distribution and the prevalence of newly created fortunes. Specifically, in the context of a random growth model of wealth accumulation, the shape of the top of the wealth distribution changes rapidly only if the pace with which new fortunes are created is fast. Quantitatively, the decision of a few families to bear a large amount of idiosyncratic risk in the form of family firms is crucial in accounting for both the prevalence of new fortunes and the dynamics of top wealth inequality.

Working papers

Wealth Inequality and Changing Asset Valuations in the Distributional National Accounts. 

This paper studies the joint distribution of wealth and its associated capital income flows, as estimated in the Distributional National Accounts (DINA), provided by Piketty et al. In particular, I study the gap between the share of wealth held by top quantiles of the wealth distribution and the share of the associated cash flows that the same individuals receive. I find that the size of this gap varies a lot over time, being especially large after the financial crisis of 2008. However, the steady rise in top wealth shares since the late 1970s is not primarily accounted for by a rise in the size of this gap. Rather, top wealth shares and shares of the associated cash flows rise together over this time period. I also study the contribution of differences in wealth growth between asset classes versus within-asset class inequality for the rise in top wealth shares. While differences in performance between asset classes partly account for fluctuations in top wealth shares, the steady rise in measured top wealth shares is primarily associated with increasingly concentrated distributions within asset classes.

Understanding 100 Years of the Evolution of Top Wealth Shares in the U.S.: What is the Role of Family Firms (with Andrew Atkeson)

We use a simple random growth model to study the role of changing dynamics of family firms in shaping the evolution of top wealth shares in the  United States over the course of the past century. Our model generates a time path for top wealth shares remarkably similar to those found by Saez and Zucman (2016) and Gomez (2019) when the volatility of idiosyncratic shocks to the value of family firms is similar to that found for public firms by Herskovic, Kelly, Lustig, and Van Nieuwerburgh (2016) over the past 100 years. We also show that consideration of family firms contributes not only to overall wealth inequality but also to considerable upward and downward mobility of families within the distribution of wealth. We interpret our results as indicating that improving our understanding of the economics of the process by which families found new firms and then, eventually, diversify their wealth is central to improving our understanding of the distribution of great wealth and its evolution over time.