How Important is Discount Rate Heterogeneity for Wealth Inequality?

31 Pages Posted: 15 Dec 2005

See all articles by Lutz Hendricks

Lutz Hendricks

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

Date Written: November 2005

Abstract

This paper investigates the role of discount rate heterogeneity for wealth inequality. The key idea is to infer the distribution of preference parameters from the observed age profile of wealth inequality. The contribution of preference heterogeneity to wealth inequality can then be measured using a quantitative life-cycle model. I find that discount rate heterogeneity increases the Gini coefficient of wealth by 0.06 to 0.11. The share of wealth held by the richest 1% of households rises by 0.03 to 0.13. The larger changes occur when altruistic bequests are large and when preferences are strongly persistent across generations. Discount rate heterogeneity also helps account for the large wealth inequality observed among households with similar lifetime earnings.

Keywords: wealth inequality, preference heterogeneity

JEL Classification: E2

Suggested Citation

Hendricks, Lutz, How Important is Discount Rate Heterogeneity for Wealth Inequality? (November 2005). CESifo Working Paper Series No. 1604, Available at SSRN: https://ssrn.com/abstract=870391

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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