The Role of Permanent Income and Demographics in Black/White Differences in Wealth

We explore the extent to which the large race gap in wealth can be explained with properly constructed income and demographic variables. In some instances we explain the entire wealth gap with income and demographics, provided that we estimate the wealth model on a sample of whites. However, we typically explain a much smaller fraction when we estimate the wealth model on a black sample. Using sibling fixed-effects models to control for intergenerational transfers and the effects of adverse history, we find that these factors are not likely to account for the lower explanatory power of the black wealth models. Our analysis of growth models of wealth suggests that differences in savings behavior and/or rates of return play an important role.