The Distribution of Wealth and Fiscal Policy in Economies With Finitely Lived Agents

We study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and intergenerational transmission of wealth. Financial markets are incomplete, exposing agents to both labor and capital income risk. We show that the stationary wealth distribution i...

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Bibliographic Details
Published in:Econometrica 2011-01, Vol.79 (1), p.123-157
Main Authors: Benhabib, Jess, Bisin, Alberto, Zhu, Shenghao
Format: Article
Language:English
Subjects:
Applications
Bequests
Capital income
capital income risk
Cross-national analysis
Distribution of wealth
Distribution theory
Economic indicators
Economic inequality
Economics
Estate taxes
Exact sciences and technology
fat tails
Financial risk
Fiscal policy
Household expenditure
Household income
income
Income distribution
Income inequality
Income taxes
Insurance, economics, finance
Lorenz Curve
Mathematics
Mobility
National income
Overlapping-generations model
Pareto
Pareto optimum
Probability and statistics
Probability theory and stochastic processes
Sciences and techniques of general use
Securities markets
Social mobility
Statistics
Studies
Taxation
Upward mobility
Wealth
Wealth distribution
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Summary:We study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and intergenerational transmission of wealth. Financial markets are incomplete, exposing agents to both labor 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, and on different degrees of social mobility. We show that capital income and estate taxes can significantly reduce wealth inequality, as do institutions favoring social mobility. Finally, we calibrate the economy to match the Lorenz curve of the wealth distribution of the U.S. economy.
ISSN:0012-9682
1468-0262
DOI:10.3982/ECTA8416