Working Paper: NBER ID: w29544
Authors: Jess Benhabib; Wei Cui; Jianjun Miao
Abstract: The distributions of wealth in the US and many other countries are strikingly concentrated on the top and skewed to the right. To explain the income and wealth inequality, we provide a tractable heterogeneous-agent model with incomplete markets in continuous time. We separate illiquid capital assets from liquid bond assets and introduce capital return jump risks. Under recursive utility, we derive optimal consumption and wealth in closed form and show that the stationary wealth distribution has an exponential right tail. Our calibrated model can match the income and wealth distributions in the US data including the extreme right tail. We also study the effect of taxes on the distribution of wealth.
Keywords: Wealth Distribution; Capital Return; Inequality; Heterogeneous Agents; Taxation
JEL Codes: C61; D83; E21; E22; E31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| portfolio heterogeneity (G11) | wealth distribution (D31) |
| difference in capital returns and interest rates (E43) | wealth accumulation (E21) |
| idiosyncratic investment risks (G11) | top wealth shares (D33) |
| stochastic nature of capital returns (G17) | wealth concentration (D31) |
| taxation on capital return jumps (H24) | wealth inequality (D31) |
| parameters chosen during calibration (C51) | wealth distribution (D31) |