Characterizing life-cycle wealth distributions using statistical inference and dominance criteria

This paper examines how the distribution of household wealth in Canada varies with age over the life cycle. The wealth distribution is characterized in terms of decile means and decile shares for each of six age groups, and comparisons between age-specific distributions are based on first-and second-order stochastic dominance criteria. It is found that (i) mean wealth levels and wealth distributions increase significantly with age in concave quadratic fashion until near-retirement and then decline, and (ii) wealth inequality declines in convex fashion with age, at first steeply and then not significantly. This joint pattern in mean and inequality of wealth holdings across age groups presents a challenge for basic theories to explain.     

Economic transition and the distributions of income and wealth

This paper relies on a model of wealth distribution dynamics and occupational choice to investigate the distributional consequences of policies and developments associated with transition from central planning to a market system. The model suggests that even an efficient privatization designed to be egalitarian may lead to increases in inequality (and possibly poverty), both during transition and in the new steady-state. Creation of new markets in services also supplied by the public sector may also contribute to an increase in inequality, as can labour market reforms that lead to a decompression of the earnings structure and to greater flexibility in employment. The results underline the importance of retaining government provision of basic public goods and services; of removing barriers that prevent the participation of the poor in the new private sector; and of ensuring that suitable safety nets are in place.     

Comparisons of heterogeneous distributions and dominance criteria

We are interested in the comparisons of standard-of-living across societies when observations of both income and household structure are available. We generalise the approach of A.B. Atkinson and F. Bourguignon (1987) [3] to the case where the marginal distributions of needs can vary across the household populations under comparison. We assume that a sympathetic observer uses a utilitarian social welfare function in order to rank heterogeneous income distributions. Insofar as any individual can play the role of the observer, we take the unanimity point of view according to which the planner?s judgements have to comply with a certain number of basic normative principles. We impose increasingly restrictive conditions on the household?s utility function and we investigate their effects on the resulting rankings of the distributions. This leads us to propose four dominance criteria that can be used for providing an unambiguous ranking of income distributions for heterogeneous populations.     

Power laws in top wealth distributions: evidence from Canada

This article investigates Pareto power law (PPL) behavior at the top of the Canadian wealth distribution. To this end, Canadian Business data on the wealthiest 100 Canadians for the years 1999–2008 are used. The resulting estimates of the PPL exponent ranged from approximately 1.0 to 1.3 depending on the year of analysis and the estimation method used. These estimates are roughly comparable to those based on Forbes’ list of the wealthiest 400 Americans. Furthermore, whereas modified OLS and maximum likelihood estimates of the power law exponents conform to Zipf’s law, the OLS estimates do not. These results raise some concerns about deducing the magnitudes of and trends in the power law exponents based on a single estimation method and highlight the importance of extensive hypothesis testing for model adequacy. The battery of diagnostic tests pertaining to PPL behavior at the top of the Canadian wealth distribution yields some conflicting results.     

Stochastic dominance and behavior towards risk: The market for Internet stocks

Internet stocks registered large gains in the late 1990s, followed by large losses from early 2000. Using stochastic dominance theory, we infer how investor risk preferences have changed over this cycle, and relate our findings to utility theory and behavioral finance. Our major findings are as follows. First, risk averters and risk seekers show a distinct difference in preference for Internet versus “old economy” stocks. This difference is most evident during the bull market period (1998–2000) where Internet stocks stochastically dominate old economy stocks for risk seekers but not risk averters. In the bear market, risk averters show an increased preference for old economy stocks, while risk seekers show a reduced preference for Internet stocks. These results are inconsistent with prospect theory and indicate that investors exhibit reverse S-shaped utility functions.     

Stochastic dominance relationships between stock and stock index futures markets: International evidence

In this paper, we first modify the stochastic dominance (SD) test for risk averters proposed by Davidson and Duclos (2000) to be the SD test for risk seekers. We then adopt both tests to examine the SD relationships between stock indices and their corresponding index futures for 10 countries. The sample contains data from 6 developed countries and 4 developing countries. The study proposes that there should be no SD relationship between spot and futures markets in developed financial markets in which arbitrage opportunities (both pure and quasi) are rare and short-lived. However, we expect that SD relationships could be found in emerging financial markets that have more impediments to arbitrage. Consistent with this conjecture, our study finds that there are no SD relationships between spot and futures markets in the mature market sample, implying that these markets could be efficient. However, for the emerging markets, spot dominates futures for risk averters, while futures dominate spot for risk seekers in the second- and third-order SD. These results indicate that there are potential gains in expected utilities for risk averters (seekers) if they switch their investment from futures (spot) to spot (futures) in the emerging markets.     

Fashion and wealth accumulation

Summary. This paper examines the influence of fashion on wealth accumulation in an economy with two groups of agents. Fashion is modelled as an externality generated by a particular dependence of individual agents' time preference on the two groups' per-capita consumption habits. It is shown that fashion causes excessive wealth fluctuations in the sense that stronger and more persistent fashion is more likely to generate limit cycles in wealth. Opposite to intuitive arguments , however, the externality in fashion does not necessarily generate instability in wealth. In a special case, equilibrium consumption and wealth are stable but the optimal ones that internalize the externality are locally unstable. Whether equilibrium consumption is excessive relative to optimal consumption depends on the distribution as well as the aggregate level of wealth. Received: December 15, 1995; revised version: July 21, 1998     

Managerial value diversion and shareholder wealth

The agents to whom shareholders delegate the management of corporateaffairs may transfer value from shareholders to themselves througha variety of mechanisms, such as self-dealing, insider trading,and taking of corporate opportunities. A common view in thelaw and economics literature is that such value diversion doesnot ultimately produce a reduction in shareholder wealth, sincevalue diversion simply substitutes for alternative forms ofcompensation that would otherwise be paid to managers. We questionthis view within its own analytical framework by studying, ina principal-agent model, the effects of allowing value diversionon managerial compensation and effort. We suggest that the standardlaw and economics view of diversion overlooks a significantcost of such behavior. Many common modes of compensation canprovide managers with incentives to enhance shareholder value;replacing such compensation would reduce these incentives. Asa result, even if the consequences of a rule permitting valuediversion can be fully taken into account in setting managerialcompensation, such a rule might still produce a reduction inshareholder wealth - and would not do so only if value diversionwould have some countervailing positive effects (a possibilitywhich our model considers) that are sufficiently significantin size.     

Relative consumption, relative wealth and growth

In a growth model where individuals care about their social status measured both by consumption and wealth comparisons, we show that status comparison in wealth heightens economic growth, while status comparison in consumption may affect negatively economic growth.     

Increasing returns to savings and wealth inequality

In this paper I present an explanation to the fact that in the data wealth is substantially more concentrated than income. Starting from the observation that the composition of households' portfolios changes towards a larger share of high-yield assets as the level of net worth increases, I first use data on historical asset returns and portfolio composition by wealth level to construct an empirical return function. I then augment an Overlapping Generation version of the standard neoclassical growth model with idiosyncratic labor income risk and missing insurance markets to allow for returns on savings to be increasing in the level of accumulated assets. The quantitative properties of the model are examined and show that an empirically plausible difference between the return faced by poor and wealthy agents is able to generate a substantial increase in wealth inequality compared to the basic model, enough to match the Gini index and all but the top 1 percentile of the US distribution of wealth.     

Envy,wealth, and class hierarchies

A persion i is said to not envy another person j if he likes his own bundle of goods as well as he would like j's bundle. This paper explores the social structure defined by the non-envy relation, and relates it to the social structure defined by market values of bundles, or wealth.     

Occupational choice, incentives and wealth distribution

We consider a model of occupational choice in large economies where individuals differ in their wealth endowment. Individuals can remain self-employed or engage in productive matches with another individual, i.e., form firms. Matches are subject to a moral hazard problem with limited liability. The division of the gains from such matches is determined by competitive forces. When the incentive problem is asymmetric, matches are typically wealth-heterogeneous, with richer individuals choosing the occupation for which incentives are more important. The utilities attained within a match depend on the wealth distribution and changes in the latter give rise to ‘trickle down’ effects.     

Credit contracting and bidding under wealth constraints

Summary. We model credit contracting and bidding in a first-price sealed-bid auction when bidder valuation and wealth are private information. An efficient separating equilibrium exists only if the wealth levels of both bidder types are sufficiently different. If not, high-valuation bidders signal by borrowing more and using less of their wealth – this is inefficient as wealth is a cheaper source of funds. An increase in the amount of borrowing required to signal does not necessarily decrease seller expected revenue. In contrast to separating equilibria, high-valuation bidders adopt pure strategy bids in pooling equilibria. Conditions are identified under which the lower bound on winning bids is higher in pooling than separating equilibria. Received: January 22, 2001; revised version: August 28, 2001     

Item non-response on income and wealth questions

This study investigates the mechanisms determining item nonresponse focusing on three issues: First, is there significant heterogeneity in item non-response across financial questions and in the association of covariates with item non-response across outcomes? Second, can the informational value of surveys be improved by matching interviewers and respondents based on their characteristics? Third, how does offering a “don’t know” answer option affect respondent behavior? The questions are answered based on detailed survey and interviewer data from the German Socioeconomic Panel using a broad set of income and wealth outcomes. We find considerable heterogeneity in non-response across financial items, little explanatory power of interviewer-respondent matches and strong evidence that ‘‘don’t know’’ answers result from mechanisms that differ from those yielding valid responses and outright refusals to respond.     

Corruption and the public display of wealth

We study an agent–client model of corruption, in which potential corruptors are uncertain about the probability with which officials are subjected to an audit, either high or low. We characterize a signaling equilibrium, in which officials who are less likely to be audited engage in public conspicuous consumption, whereas those who are more likely to be audited do not. In this equilibrium, officials are better off than in the equilibria without conspicuous consumption. The signaling equilibrium exists if the officials' bargaining power vis‐à‐vis potential corruptors is sufficiently high, which implies that corruption can be curbed by creating competition among officials.     

Probabilistic choice and stochastic dominance

This paper presents an axiomatic model of probabilistic choice under risk. In this model, when it comes to choosing one lottery over another, each alternative has a chance of being selected, unless one lottery stochastically dominates the other. An individual behaves as if he or she compares lotteries to a reference lottery—the least upper bound or the greatest lower bound in terms of stochastic dominance. The proposed model is compatible with several well-known violations of expected utility theory such as the common ratio effect and the violations of betweenness. Necessary and sufficient conditions for the proposed model are completeness, weak stochastic transitivity, continuity, common consequence independence, outcome monotonicity, and odds ratio independence.     

Relative deprivation,wealth inequality and economic growth

This paper presents an endogenous growth model where utility depends on relative deprivation as well as consumption. It is shown that a negative relationship exists between wealth inequality and equilibrium growth rate. In addition, if the concern for relative deprivation is strong enough, instantaneous utility decreases while aggregate income increases.      

Consumption,wealth and business cycles in Germany

This paper studies the long-run relationship between consumption, asset wealth and income—the consumption–wealth ratio—based on German data from 1980 to 2003. We find that departures from this long-run relationship mainly predict adjustments in income. The German consumption–wealth ratio also contains considerable forecasting power for a range of business cycle indicators, including the unemployment rate. This finding is in contrast to earlier studies for some of the Anglo-Saxon economies that have shown that the consumption–wealth ratio reverts to its long-run mean mainly through subsequent adjustments in asset prices. While the German consumption wealth ratio contains little information about future changes in German asset prices, we report that the U.S. consumption–wealth ratio has considerable forecasting power for the German stock market. One explanation of these findings is that in Germany—due to structural differences in the financial and pension systems—the share of publicly traded equity in aggregate household wealth is much smaller than in the Anglo-Saxon countries. We discuss the implications of our results for the measurement of a potential wealth effect on consumption. The views expressed in this paper are those of the authors and do not reflect the position of the Deutsche Bundesbank. We gratefully acknowledge comments and suggestions from an anonymous referee as well as from Heinz Herrmann, Helmut Lütkepohl, the editor, Baldev Raj, Burkhard Raunig, Monika Schnitzer, Harald Uhlig and Christian Upper. We also benefitted from comments by seminar participants at the ECB, the Deutsche Bundesbank, the CESifo Macro, Money and International Finance Area Conference 2005, the EEA 2005 annual congress and at the 2005 IAEA Meetings. Last but not least, we would like to thank Mark Weth for very useful information concerning the construction of the financial wealth data. Hoffmann’s work on this paper is also part of the project The International Allocation of Risk funded by Deutsche Forschungsgemeinschaft in the framework of SFB 475. Responsibility for any remaining errors and shortcomings is entirely our own.     

Evolution of wealth inequality in China

Household wealth is a key indicator that reflects national economic competiveness and individual income levels. The distribution of wealth is central for evaluating social justice in a country. This article uses a data set composed of the 2002 China Household Income Project and the 2010 Chinese Family Panel Survey to analyze the level of wealth and wealth inequality in China during 2002 and 2010. The analysis decomposes the evolution of wealth inequality during that period in terms of the structure and composition of wealth. The findings show that there was a large increase in the quantity of wealth and wealth inequality between 2002 and 2010. The level of wealth in 2010 was four times that of 2002, and housing assets were the greatest component of overall wealth in 2010. Wealth inequality also rose dramatically after 2002, with the Gini coefficient of the distribution of wealth increasing from 0.538 in 2002 to 0.739 in 2010. The rapidly escalating price of housing has been the main contributor to increasing wealth inequality in recent years.