Instability and concentration in the distribution of wealth |
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| Institution: | 1. Robert Day School of Economics and Finance, Claremont McKenna College, 500 E. Ninth St., Claremont, CA 91711, United States;2. INTECH, One Palmer Square, Princeton, NJ 08542, United States;1. School of Economics, LeBow College of Business, Drexel University, 3141 Chestnut Street, Philadelphia, PA 19104, United States;2. Research Institute of Economics and Management, Southwestern University of Finance and Economics, 55 Guanghuacun Street, Chengdu, Sichuan 610074, China;1. 371 Lowell Ave, Newton, MA 02460, United States;2. Hanken School of Economics, P.O. Box 479, 00101 Helsinki, Finland;1. KU Leuven & Deutsche Bundesbank, Center for Economic Studies, Naamsestraat 69, 3000 Leuven, Belgium;2. TU Dortmund University, Faculty of Business, Economics, and Social Sciences, Vogelpothsweg 87, 44221 Dortmund, Germany;1. Free University of Bolzano-Bozen, Faculty of Economics and Management, Italy;2. European Central Bank, Germany;3. University of Pavia, Department of Economics and Management, Italy;4. Borsa Italiana London Stock Exchange Group, Italy;1. McMaster University, Department of Mathematics and Statistics, Hamilton, Ontario L8S 4K1, Canada;2. IMT Institute for Advanced Studies Lucca; AXES Research Unit; Piazza San Francesco, 19 55100 Lucca, Italy |
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| Abstract: | We consider a setup in which infinitely lived households face idiosyncratic investment risk and show that in this case the equilibrium distribution of wealth becomes increasingly right-skewed over time until wealth concentrates entirely at the top. The households in our setup are identical in terms of their patience and their abilities, and we assume that there are no redistributive mechanisms—neither explicit in the form of government tax or fiscal policies, nor implicit in the form of limited intergenerational transfers. Our results demonstrate that the presence of such redistributive mechanisms alone ensures the stability of the distribution of wealth over time. |
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| Keywords: | Wealth distribution Inequality Incomplete markets |
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