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Increasing Returns to Savings and Wealth Inequality

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Author Info
Claudio Campanale (University of Alicante)

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Abstract

In this paper I present an explanation to the fact that in the data wealth is substantially more concentrated than income. Starting from the observation that the composition of households' portfolios changes towards a larger share of high-yield assets as the level of net worth increases, I first use data on historical asset returns and portfolio composition by wealth level to construct an empirical return function. I then augment an Overlapping Generation version of the standard neoclassical growth model with idiosyncratic labor income risk and missing insurance markets to allow for returns to savings to be increasing in the level of accumulated assets. The quantitative properties of the model are examined and show that an empirically plausible difference between the return faced by poor and wealthy agents is able to generate a substantial increase in wealth inequality compared to the basic model, enough to match the Gini index and all but the top 1 percentile of the U.S. distribution of wealth. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2007.02.003
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Publisher Info
Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 10 (2007)
Issue (Month): 4 (October)
Pages: 646-675
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Handle: RePEc:red:issued:04-102

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Related research
Keywords: Wealth inequality; Self-insurance; Portfolio composition; Increasing returns;

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Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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