Wealth Inequality
Heterogeneous Dynasties and Long-Run Mobility,
with Jess Benhabib and Ricardo Fernholz, Economic Journal, forthcoming 2022.
Recent empirical work has demonstrated a positive correlation between grandparent- child wealth-rank, even after controlling for parent-child wealth-rank, as well as a positive correlation between dynastic wealth-ranks across almost 600 years. We show that a simple heterogeneous agents model with idiosyncratic returns to wealth generates a realistic wealth distribution but fails to capture these long-run patterns of wealth mobility. However, an extension of the basic model which includes persistent heterogeneity in returns to wealth is able to simultaneously match the wealth distribution, short-run wealth mobility, and long-run wealth mobility.
Wealth Distribution and Social Mobility: A Quantitative Analysis of U.S Data,
with Jess Benhabib and Mi Luo, American Economic Review , 109(5), 1623–1647, 2019.
We quantitatively identify the factors that drive wealth dynamics in the United States and are consistent with its skewed cross-sectional distribution and with social mobility. We concentrate on three critical factors: (i) skewed earnings, (ii) differential saving rates across wealth levels, and (iii) stochastic idiosyncratic returns to wealth. All of these are fundamental for matching both distribution and mobility.
The stochastic process for returns which best fits the cross-sectional distribution of wealth and social mobility in the United States shares several statistical properties with those of the returns to wealth uncovered by Fagereng et al. (2017) from tax records in Norway.
Skewed Wealth Distributions: Theory and Empirics,
with Jess Benhabib, Journal of Economic Literature, 56(4), 1261-91, 2018.
Invariably, across a cross-section of countries and time periods, wealth distributions are skewed to the right displaying thick upper tails, that is, large and slowly declining top wealth shares. In this survey, we categorize the theoretical studies on the distribution of wealth in terms of the underlying economic mechanisms generating skewness and thick tails. Further, we show how these mechanisms can be micro-founded by the consumption–savings decisions of rational agents in specific economic and demographic environments. Finally we map the large empirical work on the wealth distribution to its theoretical underpinnings.
Earnings Inequality and Other Determinants of Wealth Inequality,
with Jess Benhabib and Mi Luo, American Economic Review Papers & Proceedings, 107(5), 593-97, 2017.
We introduce a simple but deep theoretical result is useful to understand why it is difficult to reproduce important statistical properties of the wealth distribution which are observed in the data with earnings inequality and precautionary savings alone.
The Wealth Distribution in Bewley Models with Investment Risk,
with Jess Benhabib and Shenghao Zhu, Journal of Economic Theory, 159, 489–515, 2015.
We study the wealth distribution in Bewley economies with idiosyncratic capital income risk. We show analytically that under rather general conditions on the stochastic structure of the economy, a unique ergodic distribution of wealth displays a fat tail.
The Distribution of Wealth and Fiscal Policy in Economies with Finitely Lived Agents,
with Jess Benhabib and Shenghao Zhu, Econometrica, 79(1), 122-57, 2011 (re-printed in The Economics of Wealth Distribution, J.B. Davies, Ed., Edward Elgar Publishing 2013).
We study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and intergenerational transmission of wealth. Financial markets are incomplete, exposing agents to both labor and capital income risk. We show that the stationary wealth distribution is a Pareto distribution in the right tail and that it is capital income risk, rather than labor income, that drives the properties of the right tail of the wealth distribution. We also study analytically the dependence of the distribution of wealth—of wealth inequality in particular—on various fiscal policy instruments like capital income taxes and estate taxes, and on different degrees of social mobility. We show that capital income and estate taxes can significantly reduce wealth inequality, as do institutions favoring social mobility. Finally, we calibrate the economy to match the Lorenz curve of the wealth distribution of the U.S. economy.
The Distribution of Wealth and Redistributive Policies in Economies with Infinitely Lived Agents,
with Jess Benhabib, 2007.
We study the dynamics of the distribution of wealth in an economy with intergenerational transmission of wealth and redistributive fiscal policy. We characterize the transitional dynamics of the distribution of wealth as well as its stationary state. We show that the stationary wealth distribution is a Pareto distribution. We study analytically the dependence of the distribution of wealth, of wealth inequality, and of utilitarian social welfare on various redistributive fiscal policy instruments like capital income taxes, estate taxes, and welfare subsidies.