Wealth Distribution with Random Discount Factors

36 Pages Posted: 7 Nov 2017 Last revised: 12 Oct 2020

See all articles by Alexis Akira Toda

Alexis Akira Toda

University of California, San Diego (UCSD) - Department of Economics

Date Written: September 6, 2018


To explain the Pareto tail behavior empirically observed in wealth distributions, the quantitative macro literature has occasionally assumed that agents have random discount factors. This paper formally proves that the stationary wealth distribution in a simple Huggett model with random discounting has power law tails and characterizes the Pareto exponents analytically. I find that in general there is no clear relationship between the return on wealth and inequality and that the Pareto exponent is highly sensitive to the persistence of the discount factor process. I also provide a practical guidance for how to characterize the Pareto exponents in richer models.

Keywords: Bewley-Huggett-Aiyagari model, inequality, Pareto exponent, power law, random growth model

JEL Classification: C62, D31, D58, E21

Suggested Citation

Toda, Alexis Akira, Wealth Distribution with Random Discount Factors (September 6, 2018). Journal of Monetary Economics, Vol. 104, 2019, Available at SSRN: https://ssrn.com/abstract=3065725 or http://dx.doi.org/10.2139/ssrn.3065725

Alexis Akira Toda (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

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Mail Code 0508
La Jolla, CA 92093-0508
United States

HOME PAGE: http://https://sites.google.com/site/aatoda111/

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