Determinants of Wealth Inequality and Mobility in General Equilibrium
66 Pages Posted: 4 Mar 2019 Last revised: 4 Dec 2020
Date Written: February 13, 2019
What determines wealth inequality and mobility and how can the policy maker influence it? This paper quantifies in closed form the bottom and the top (Pareto) tail of the distribution in a continuous-time heterogeneous agent model. Financial market imperfections play a key role, for which factors that increase inequality also reduce mobility. While a bequest tax reduces inequality, its effects are dampened in general equilibrium. We formally show that the welfare trade-off for bequest taxes depends crucially on the bequest elasticity. However, in the calibrated model, even suboptimal bequest taxes have little adverse welfare effects.
Keywords: wealth inequality, mobility of wealth, portfolio selection, fat tails, bequest tax
JEL Classification: D31, E21, H21, C68, G11
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