A Statistical Model of Inequality

46 Pages Posted: 22 Feb 2016

See all articles by Ricardo T. Fernholz

Ricardo T. Fernholz

Claremont McKenna College - Robert Day School of Economics and Finance

Date Written: January 19, 2016

Abstract

This paper develops a statistical model of wealth distribution that imposes no parametric structure on the fluctuations of household wealth. In this general setting, we use new techniques to obtain a closed-form household-by-household characterization of the stable distribution of wealth and show that this distribution is shaped entirely by two factors — the reversion rates (a measure of cross-sectional mean reversion) and idiosyncratic volatilities of wealth across different ranked households. By estimating these factors, our model can exactly match the U.S. wealth distribution. This provides information about the current trajectory of inequality as well as estimates of the distributional effects of progressive capital taxes. We find evidence that the U.S. wealth distribution might be on a temporarily unstable trajectory, thus suggesting that further increases in top wealth shares are likely in the near future. For capital taxes, we find that a small tax levied on just 1% of households substantially reshapes the distribution of wealth and reduces inequality.

Keywords: wealth distribution, capital taxes, inequality, nonparametric methods

JEL Classification: E21, C14, D31

Suggested Citation

Fernholz, Ricardo T., A Statistical Model of Inequality (January 19, 2016). Available at SSRN: https://ssrn.com/abstract=2735873 or http://dx.doi.org/10.2139/ssrn.2735873

Ricardo T. Fernholz (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States

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