How Important is Preference Heterogeneity for Wealth Inequality?
17 Pages Posted: 11 Jun 2004
Date Written: June 2004
This paper investigates to what extent preference heterogeneity helps account for two observations that challenge standard life-cycle theory: (i) The richest 1% of households hold at least 25% of total wealth. (ii) Households with similar lifetime earnings hold very different amounts of wealth. The key idea is to infer the distribution of preference parameters from data on how consumption and wealth inequality vary as cohorts age. I find that time preference heterogeneity helps account for wealth inequality among households with similar lifetime earnings, but makes only a modest contribution towards accounting for high wealth observations. Heterogeneity in risk aversion has only minimal effects on saving and wealth inequality.
Keywords: Wealth inequality, preference heterogeneity
JEL Classification: E2
Suggested Citation: Suggested Citation