Working Paper: CEPR ID: DP1187
Authors: Giuseppe Bertola
Abstract: This paper considers an economy where inequality originates from exogenous `talent' or `market luck' shocks and is transmitted over time by the same saving decisions that determine the aggregate rate of accumulation. The resulting interactions between factor- and personal-income distribution are studied in the light of existing analytic results from the precautionary-savings literature, and by numerical solution experiments. Aggregate savings are an increasing function of non-accumulated income variability, as individuals try to self-insure by accumulating wealth. In dynamic general equilibrium, however, non-accumulated income flows (`wages') depend endogenously on aggregate wealth accumulation. The level and/or the anticipated growth rate of wages affect microeconomic saving decisions so as to induce remarkable stability of long-run accumulated wealth distributions across parameter sets.
Keywords: uninsurable risk; savings; factor-income distribution
JEL Codes: 031; E2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| income variability (D31) | increased savings (D14) |
| increased savings (D14) | wealth distribution (D31) |
| anticipated growth rate of wages (J39) | wealth accumulation (E21) |
| increased savings (D14) | capital intensity (E22) |
| wealth accumulation (E21) | anticipated growth rate of wages (J39) |
| income variability (D31) | wealth distribution (D31) |