Life Cycle Models, Heterogeneity of Initial Assets, and Wealth Inequality

34 Pages Posted: 1 Dec 2017

See all articles by Pedro C. Ferreira

Pedro C. Ferreira

Graduate School of Economics at Fundacao Getulio Vargas (EPGE/FGV)

Diego B. P. Gomes

International Monetary Fund (IMF)

Date Written: December 21, 2015

Abstract

Life cycle general equilibrium models with heterogeneous agents have a very hard time reproducing the American wealth distribution. A common assumption made in this literature is that all young adults enter the economy with no initial assets. In this article, we relax this assumption – not supported by the data – and evaluate the ability of an otherwise standard life cycle model to account for the U.S. wealth inequality. The new feature of the model is that agents enter the economy with assets drawn from an initial distribution of assets. We found that heterogeneity with respect to initial wealth is key for this class of models to replicate the data. According to our results, American inequality can be explained almost entirely by the fact that some individuals are lucky enough to be born into wealth, while others are born with few or no assets.

Suggested Citation

Cavalcanti Ferreira, Pedro and B. P. Gomes, Diego, Life Cycle Models, Heterogeneity of Initial Assets, and Wealth Inequality (December 21, 2015). Available at SSRN: https://ssrn.com/abstract=3079250 or http://dx.doi.org/10.2139/ssrn.3079250

Pedro Cavalcanti Ferreira

Graduate School of Economics at Fundacao Getulio Vargas (EPGE/FGV) ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil
+55 21 559 5840 (Phone)
+55 21 553 8821 (Fax)

Diego B. P. Gomes (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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