Permanent-Income Inequality

61 Pages Posted: 25 Feb 2019 Last revised: 11 Mar 2019

See all articles by Brant Abbott

Brant Abbott

Queen's University - Department of Economics

Giovanni Gallipoli

Vancouver School of Economics, UBC; Centre for Economic Policy Research (CEPR); University of Chicago - Becker Friedman Institute for Economics; Rimini Centre for Economic Analysis

Date Written: February 2019

Abstract

We characterize the distribution of permanent-income and quantify the value of assets and human capital in lifetime wealth portfolios. We estimate the distribution of human wealth using nonparametric identification results that allow for state-dependent stochastic discounting and unobserved heterogeneity. The approach imposes no restrictions on income processes or utility. Accounting for the value of human capital delivers a different view of inequality: (i) in 2016 the top 10% share of permanent-income was 1/3 lower than the corresponding share of assets; (ii) however, since 1989, the top 10% share of permanent-income has grown much faster than the corresponding share of assets. Human wealth has a mitigating influence on inequality, but this effect has waned over time due to the growing importance of assets in lifetime wealth portfolios. We find that consumption expenditures are tightly linked to permanent-income; however, liquidity constraints can lead to substantial deviations below permanent-income.

Keywords: Consumption, Human Capital, inequality, permanent income, Wealth

JEL Classification: D31, D6, E2, E21, I24, J17, J24

Suggested Citation

Abbott, Brant and Gallipoli, Giovanni, Permanent-Income Inequality (February 2019). CEPR Discussion Paper No. DP13540. Available at SSRN: https://ssrn.com/abstract=3341347

Brant Abbott (Contact Author)

Queen's University - Department of Economics ( email )

99 University Avenue
Kingston K7L 3N6, Ontario
Canada

Giovanni Gallipoli

Vancouver School of Economics, UBC ( email )

6000 Iona drive
Vancouver, BC BC V6T 1L4
Canada

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

University of Chicago - Becker Friedman Institute for Economics ( email )

Chicago, IL 60637
United States

Rimini Centre for Economic Analysis ( email )

Rimini
Italy

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