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How important is discount rate heterogeneity for wealth inequality?

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  • Hendricks, Lutz

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 around 0.07 to levels that are close to the data. The share of wealth held by the richest 1% of households rises by around 0.04, but falls short of the data by more than ten percentage points. Discount rate heterogeneity also helps account for the large wealth inequality observed among households with similar lifetime earnings.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 31 (2007)
Issue (Month): 9 (September)
Pages: 3042-3068

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Handle: RePEc:eee:dyncon:v:31:y:2007:i:9:p:3042-3068

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