Income Inequality and Asset Prices Under Redistributive Taxation

39 Pages Posted: 17 Oct 2015 Last revised: 9 May 2017

See all articles by Lubos Pastor

Lubos Pastor

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Pietro Veronesi

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 5 versions of this paper

Date Written: February 19, 2016

Abstract

Our simple model features agents heterogeneous in skill and risk aversion, incomplete financial markets, and redistributive taxation. In equilibrium, agents become entrepreneurs if their skill is sufficiently high or risk aversion sufficiently low. Under heavier taxation, entrepreneurs are more skilled and less risk-averse, on average. Through these selection effects, the tax rate is positively related to aggregate productivity and negatively related to the equity risk premium. Both income inequality and stock prices initially increase but eventually decrease with the tax rate. Investment risk, stock market participation, and skill heterogeneity all contribute to inequality. Cross-country empirical evidence supports the model's predictions.

Keywords: inequality, redistribution, taxation, asset pricing, entrepreneurship, heterogeneous agents, incomplete markets

JEL Classification: E24, G12, G18, H23, J24, J31, J38

Suggested Citation

Pastor, Lubos and Veronesi, Pietro, Income Inequality and Asset Prices Under Redistributive Taxation (February 19, 2016). Available at SSRN: https://ssrn.com/abstract=2674633 or http://dx.doi.org/10.2139/ssrn.2674633

Lubos Pastor (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
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773-834-4080 (Phone)
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HOME PAGE: http://www.ChicagoGSB.edu/fac/lubos.pastor/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Pietro Veronesi

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-6348 (Phone)
773-702-0458 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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