Accounting for Patterns of Wealth Inequality

ASU Department of Economics Working Paper No. 8/02

47 Pages Posted: 2 Apr 2003

See all articles by Lutz Hendricks

Lutz Hendricks

UNC Chapel Hill; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: November 2002

Abstract

The life-cycle model is a standard theoretical framework for studying savings and wealth inequality. This paper shows that life-cycle models have difficulties accounting for the empirical relationship between lifetime earnings and household wealth. Quantitative life-cycle models imply a far tighter relationship between earnings and wealth than is observed in U.S. data. As a result, life-cycle models greatly overstate wealth differences between earnings rich and earnings poor households while at the same time underpredicting wealth inequality among households with similar lifetime earnings. Incorporating several features thought to be important for understanding wealth inequality, in particular bequests and entrepreneurship, does not improve the model's ability to account for the data. These findings suggest that standard life-cycle theory fails to account for an important source of wealth inequality.

Keywords: Wealth inequality, bequests

JEL Classification: E2

Suggested Citation

Hendricks, Lutz, Accounting for Patterns of Wealth Inequality (November 2002). ASU Department of Economics Working Paper No. 8/02, Available at SSRN: https://ssrn.com/abstract=354200 or http://dx.doi.org/10.2139/ssrn.354200

Lutz Hendricks (Contact Author)

UNC Chapel Hill ( email )

Chapel Hill, NC 27599
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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