Income Inequality and Asset Prices Under Redistributive Taxation

51 Pages Posted: 28 Oct 2015

See all articles by Lubos Pastor

Lubos Pastor

University of Chicago - Booth School of Business

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: October 2015

Abstract

We develop a simple general equilibrium model with heterogeneous agents, incomplete financial markets, and redistributive taxation. Agents differ in both skill and risk aversion. 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 expected stock market return. Both income inequality and the level of 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 largely supports the model's predictions.

Keywords: asset pricing, entrepreneurship, inequality, redistribution, taxation

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

Suggested Citation

Pastor, Lubos and Veronesi, Pietro, Income Inequality and Asset Prices Under Redistributive Taxation (October 2015). CEPR Discussion Paper No. DP10899, Available at SSRN: https://ssrn.com/abstract=2682566

Lubos Pastor (Contact Author)

University of Chicago - Booth School of Business ( email )

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HOME PAGE: http://www.ChicagoGSB.edu/fac/lubos.pastor/

Pietro Veronesi

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States
773-702-6348 (Phone)
773-702-0458 (Fax)

Centre for Economic Policy Research (CEPR)

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United Kingdom

National Bureau of Economic Research (NBER)

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