Disparity in Wealth Accumulation: A Financial Market Approach
39 Pages Posted: 5 Feb 2016 Last revised: 8 Feb 2016
Date Written: February 8, 2016
In this paper we study the extent to which the financial market has contributed to wealth disparities. To that end we introduce a stochastic dynamic model of wealth accumulation with preferences, consumption and portfolio choice, which roughly replicates the long-term evolution of assets under management. Using an algorithm for solving nonlinear model predictive control, we run simulations with three classes of investors (conservative, moderate and aggressive) corresponding, roughly, to the social classes identified in Piketty (2013) for thinking about distributional matters, namely the lower class (bottom 50 percent), the middle class (middle 40 percent), and the upper class (upper 10 percent) respectively. We estimate the impact on the end wealth distribution of first, investor-level characteristics (calibrated for each investor class), which directly impact the saving rate; and second, higher expected returns for wealthier (aggressive) investors in the top decile through the availability of leverage. We find that differences in investor-level characteristics (and significantly the length of the optimization horizon) combined with access to leverage are sufficient to generate fat tails. Though results are obtained in a stochastic approach, the outcomes are less related to stochastic shocks than to some feedback and scale effects operating in favor of some investors in the financial market.
Keywords: Life-cycle, portfolio choice, wealth distribution, nonlinear-predictive-control
JEL Classification: G110, D31
Suggested Citation: Suggested Citation