Persistent Heterogeneous Returns and Top End Wealth Inequality

Review of Economic Dynamics, Forthcoming

80 Pages Posted: 28 Jul 2016 Last revised: 9 Oct 2017

See all articles by Dan Cao

Dan Cao

Georgetown University - Department of Economics

Wenlan Luo

Tsinghua University - School of Economics & Management

Date Written: September 1, 2017

Abstract

We document in US data that returns to wealth across households are significantly heterogeneous, and persistently so. Motivated by this observation, we build a tractable general equilibrium model where households face persistent idiosyncratic returns to study the US wealth distribution. We show theoretically that the wealth distribution in the model admits a Pareto tail and characterize how the tail index depends on salient equilibrium variables including capital-output ratio, labor share, interest rate, and growth rate. Quantitatively, to match the observed US wealth distribution it requires significant heterogeneity in returns, consistent with our empirical findings. Finally, we show in the model that financial deregulation and a reduction in US corporate tax rates can generate the joint evolution of rising wealth inequality, rising capital-output ratio and declining labor share since the 1980s.

Keywords: Top End Wealth Inequality, Pareto Wealth Distribution, Sufficient Statistics, Heterogeneous Returns, r-g, Corporate Tax, Financial Deregulation

JEL Classification: D31, D33, E13, E21, E25, E44

Suggested Citation

Cao, Dan and Luo, Wenlan, Persistent Heterogeneous Returns and Top End Wealth Inequality (September 1, 2017). Review of Economic Dynamics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2814745 or http://dx.doi.org/10.2139/ssrn.2814745

Dan Cao (Contact Author)

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States

Wenlan Luo

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

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