Working Paper: NBER ID: w14730
Authors: Jess Benhabib; Alberto Bisin
Abstract: We study the dynamics of the distribution of overlapping generation economy with finitely lived agents and inter-generational transmission of wealth. Financial markets are incomplete, exposing agents to both labor income 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. We show that capital income and estate taxes can significantly reduce wealth inequality. Finally, we characterize optimal redistributive taxes with respect to a utilitarian social welfaremeasure. Social welfare is maximized short of minimal wealth inequality and with zero estate taxes. Finally, we study the effects of different degrees of social mobility on the wealth distribution.
Keywords: No keywords provided
JEL Codes: E21; E25
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital income risk (E25) | properties of the right tail of the wealth distribution (D39) |
| capital income taxes (E25) | stochastic returns on wealth (G19) |
| estate taxes (H24) | stochastic returns on wealth (G19) |
| labor income risk (J39) | properties of the right tail of the wealth distribution (D39) |
| social mobility (J62) | wealth inequality (D31) |
| capital income taxes (E25) | wealth inequality (D31) |
| estate taxes (H24) | wealth inequality (D31) |