Wealth distribution, Inequality and Redistributive Policies

‘ Markups and Inequality,’ Boar C. and V. Midrigan, 2019.

We study the aggregate and distributional impact of product market interventions and profit taxes using a model of firm dynamics, credit constraints and incomplete markets. A key ingredient of our model is that markups are endogenous so that the markup a producer charges depends on the amount of competition it faces. We show that size-dependent subsidies that remove the distortions due to markup dispersion lead to sizable welfare gains and reduce inequality, even though they increase firm concentration and long-run misallocation. In contrast, policies that reduce concentration lead to large output, TFP and welfare losses and increase inequality. A tax on profits greatly depresses the incentives to create new firms, reducing labor demand, after-tax wages and welfare.

‘ Dynastic Precautionary Savings,’ Boar C., 2018.

This paper documents that parents accumulate savings to insure their children against income risk. I refer to this behavior as dynastic precautionary saving and quantify its extent using matched parent-child pairs from the Panel Study of Income Dynamics and exploiting variation in income risk across age, industries and occupations. I then build a model of altruistically linked overlapping generations, in which parents and children interact strategically, that is quantitatively consistent with the empirical evidence. I argue that strategic interactions are important for generating the observed dynastic precautionary behavior and use the model to show this component of household savings is quantitatively important for wealth accumulation, intergenerational transfers and consumption insurance.

‘ Entrepreneurship, Agency Frictions and Redistributive Capital Taxation,’ Boar C. (with M. Knowles) 2018.

Motivated by the observation that among OECD countries redistribution is negatively correlated with entrepreneurial activity, we examine the implications of entrepreneurial financial frictions for optimal linear capital taxation, in a setting where the government is concerned with redistribution. By including financial frictions, we emphasize the effect of a new channel affecting the equity-efficiency trade-off of redistribution: taxes affect the allocative efficiency of capital and, ultimately, total factor productivity. In our setting, optimal tax rates can be closely approximated by simple closed-form functions of pre-tax prices and parameters. Under plausible parameter values, we find that it is optimal to tax both consumption and wealth at relatively high positive rates and optimal to tax capital income at a negative rate. This is because capital income taxes are more inefficient than both consumption and wealth taxes in terms of their effect on aggregate total factor productivity, in addition to their well-known effect of reducing aggregate capital accumulation.

‘ Optimal Positive Capital Taxes at Interior Steady States,’ Benhabib, J. with B. Szoke, 2019.

We generalize recent results of Bassetto and Benhabib (2006) and Straub and Werning (2018) in a model with endogenous labor-leisure choice where all agents are allowed to save and accumulate capital. In particular, using a neoclassical infinite horizon model with standard balanced growth preferences and agents heterogeneous in their initial wealth holdings, we provide a sufficient condition under which optimal redistributive capital taxes can remain at their allowed upper bound forever, even if the resulting equilibrium trajectory converges to a unique steady state with positive and finite consumption, capital, and labor. We first generate some simple parametric examples which satisfy our sufficient condition and for which closed-form solutions exist. We then provide an interpretation of our sufficient condition for equilibria induced by general constant returns neoclassical production functions. Using recent evidence on wealth distribution in the United States, we argue that our sufficient condition is empirically plausible.

‘Capital and Inequality in the Long Run: Automation Without Technical Progress,’ Ray, D. ( with D. Mookherjee ), 2017.

We present a theory of long run inequality and automation driven by capital accumulation rather than technical progress. Rising capital-labor ratios lower the prices of “robots,” which then displace human workers to different degrees in heterogeneous production sectors. Under a singularity condition on the technology of the robot-producing sector, humans eventually get displaced by robots in the production of robots. Thereafter, rising outputs can be produced using capital and robots alone, leading to progressive automation of all other sectors in the economy, and causing capital’s share in national income to approach 100%. At the same time, real wages rise in the long run in the absence of barriers to inter-sectoral mobility. However, when the singularity condition does not hold, the robot sector and some final goods sectors are forever protected from automation, allowing (human) labor to retain a positive fraction of income. Our theory is backed by existing empirical evidence, and explains how capital’s share of income can rise following capital accumulation despite low capital-labor elasticities of substitution in all sectors.

‘The Geography of Poverty and Nutrition: Food Access and Food Choices Across the United States,’ Allcott, H. ( with R. Diamond, J. Dube ), 2017.

We study the causes of “nutritional inequality”: why the wealthy tend to eat more healthfully than the poor in the U.S. Using event study designs exploiting supermarket entry and households’ moves to healthier neighborhoods, we reject that neighborhood environments have meaningful effects on healthy eating. Using a structural demand model, we find that exposing low-income households to the same availability and prices experienced by high-income households reduces nutritional inequality by only 9%, while the remaining 91% is driven by differences in demand. These findings contrast with discussions of nutritional inequality that emphasize supply-side factors such as food deserts.

‘Age, Luck and Inheritance,’ Benhabib, J. (with S. Zhu), 2009.

We introduce the investment risk into a heterogeneous agents model and present a mechanism to analytically generate a double Pareto distribution of wealth. We replicate the distribution of the U.S. wealth and especially the three prominent features: a high Gini coefficient, skewness to the right, and Pareto tails. We disentangle the contribution of inheritance, age and stochastic rates of capital return to wealth inequality, in particular to the Gini coefficient. Finally, we investigate the effects of the fiscal and redistributive policies on wealth inequality and social welfare.

‘The distribution of wealth: Intergenerational transmission and redistributive policies,’ Benhabib, J. and A. Bisin, 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.

‘Inequality, Business Cycles and Fiscal-Monetary Policy,’ Sargent, T. (with A. Bhandari, D. Evans and M. Golosov), 2017.

We study fluctuations in macroeconomic aggregates and cross-section income and wealth distributions in a heterogeneous agent model with incomplete markets and sticky nominal prices. Optimal fiscal-monetary policy balances gains from ”fiscal hedging” against benefits from redistributional hedging that responds to social concerns about inequality. A Ramsey planner uses inflation to offset inequality-increasing shocks to the cross-section distribution of labor earnings. A calibration that imitates how US recessions reshape that crosssection distribution in ways documented by Guvenen et al. (2014) indicates that substantial welfare benefits come from making inflation respond to aggregate shocks.