Firm Heterogeneity and Wealth Distribution

45 Pages Posted: 2 Jan 2019

See all articles by Hoipan Wong

Hoipan Wong

Washington University in St. Louis, College of Arts & Sciences, Department of Economics, Students

Date Written: December 4, 2018

Abstract

In this paper I study how firm heterogeneity affects wealth distribution through entrepreneurial income and capital gains. As shown in Hottman, Redding and Weinstein 2016, size distribution of firms is highly skewed. Top 1% of firms on average have market shares of 50%. I develop a dynamic heterogeneous-agent general equilibrium model, where firms produce multiple products and households invest by bargaining with firm owners. Every product in this model has two dimensions: its rate of return and its optimal output. Every firm thus has two dimensions: its rate of return and size. Investors sort into different firms based on their wealth, which increases due to either their share of firm's profit or their capital gains. The distribution of product space is calibrated with Nielsen barcode dataset. The simulation shows that the firm heterogeneity in its two dimensions implied by the dataset results in a severe wealth inequality. The model can explain 90% of the rise in top wealth concentration between 2003 and 2012 in the United States and shows that the upswing in the top 1% wealth share is due to the rise in the top 0.1%, which is consistent with Saez and Zucman 2016. Counterfactual exercises highlight entrepreneurship as the main driver in wealth equality and show that fluctuations in risk free rate of return and access to new investment opportunities reduce wealth inequality, of which each may offset up to half of the effect of entrepreneurship.

Keywords: Wealth Distribution, Entrepreneur Income, Firm Heterogeneity, Multi-product firms

JEL Classification: D31, L11, M13

Suggested Citation

Wong, Hoipan, Firm Heterogeneity and Wealth Distribution (December 4, 2018). Available at SSRN: https://ssrn.com/abstract=3295395 or http://dx.doi.org/10.2139/ssrn.3295395

Hoipan Wong (Contact Author)

Washington University in St. Louis, College of Arts & Sciences, Department of Economics, Students ( email )

WA
United States

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