Working Paper: CEPR ID: DP17590
Authors: Stéphane Auray; Aurlien Eyquem; Bertrand Garbinti; Jonathan Goupille-Lebret
Abstract: How to explain rising income and wealth inequality? We build an original heterogeneous agent model with three key features: (i) an explicit link between firm's market power and top income shares, (ii) a granular representation of the tax and transfer system, and (iii) three assets with endogenous portfolio decisions. Using France as an illustration, we look at how changes in markups, taxes, factor productivity, and asset prices affect inequality dynamics over the 1984-2018 period. Rising markups account for the bulk of rising income inequality. Wealth inequality dynamics result mostly from changes in saving rate inequality but only in response to the exogenous changes in taxation and markups. Our results point to the critical importance of endogenous saving decisions in response to exogenous shocks as a key driver of wealth inequality.
Keywords: heterogeneous agents; taxes; income inequality; wealth inequality
JEL Codes: D4; E2; H2; O4; O52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rising markups (D43) | increasing income inequality (D31) |
| exogenous changes in taxation (H29) | changes in saving rate inequality (E21) |
| exogenous changes in markups (D43) | changes in saving rate inequality (E21) |
| changes in saving rate inequality (E21) | wealth inequality dynamics (D31) |
| changes in taxation (H29) | wealth inequality dynamics (D31) |
| changes in markups (L11) | wealth inequality dynamics (D31) |
| changes in capital gains taxation (F38) | wealth growth rate of the bottom 90% (D31) |
| changes in capital gains taxation (F38) | wealth growth rate of the top 10% (D31) |