An Equilibrium Model of Wealth Distribution
27 Pages Posted: 8 Feb 2006
Date Written: February 3, 2006
Abstract
I present an explicitly solved model for the distribution of wealth and income in an incomplete-markets economy. I first propose a consumption model with an inter-temporally dependent preference (Uzawa (1968) and Obstfeld (1990)). I then derive an analytical consumption rule which captures stochastic precautionary saving motive and generates stationary wealth accumlation. Finally, I provide a complete characterization for the equilibrium cross-selectional distribution of wealth and income in closed form by developing a recursive formulation for the moments of the distribution of wealth and income. Using this recursive formulation, I show that income persistence and the degree of wealth mean reversion are the main determinants of wealth-income correlation and relative dispersions of wealth to income, such as skewness and kurtosis ratios between wealth and income.
Keywords: precautionary savings, wealth distribution, Bewley models, affine process, recursive utility, stochastic discounting
JEL Classification: D91, E21
Suggested Citation: Suggested Citation
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