Working Paper: CEPR ID: DP13540
Authors: Brant Abbott; Giovanni Gallipoli
Abstract: We characterize the distribution of permanent-income and quantify the value of assets and human capital in lifetime wealth portfolios. We estimate the distribution of human wealth using nonparametric identification results that allow for state-dependent stochastic discounting and unobserved heterogeneity. The approach imposes no restrictions on income processes or utility. Accounting for the value of human capital delivers a different view of inequality: (i) in 2016 the top 10% share of permanent-income was 1/3 lower than the corresponding share of assets; (ii) however, since 1989, the top 10% share of permanent-income has grown much faster than the corresponding share of assets. Human wealth has a mitigating influence on inequality, but this effect has waned over time due to the growing importance of assets in lifetime wealth portfolios. We find that consumption expenditures are tightly linked to permanent-income; however, liquidity constraints can lead to substantial deviations below permanent-income.
Keywords: Wealth; Human Capital; Permanent Income; Consumption; Inequality
JEL Codes: J17; J24; E2; E21; D6; D31; I24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| human wealth (O15) | inequality (D63) |
| asset wealth (G19) | inequality (D63) |
| permanent income (D31) | consumption expenditures (E20) |
| liquidity constraints (E41) | consumption expenditures (E20) |
| top 10 share of permanent income (E25) | top 10 share of assets (G11) |
| growth rate of top 10 share of permanent income (F62) | growth rate of asset wealth (E21) |
| market incompleteness (D52) | human wealth valuations (J17) |