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A Becker–Tomes model with investment risk

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  • Shenghao Zhu

    (University of International Business and Economics)

Abstract

Recent studies find that sufficiently volatile idiosyncratic investment risk plays an important role in generating wealth inequality. I introduce idiosyncratic investment risk into the Becker and Tomes (J Polit Econ 87:1153–1189, 1979) model and find an explicit expression of the stationary wealth distribution in this simple model. This explicit expression brings us new insights of how bequest motives and estate taxes influence wealth distributions. I find that inheritance increases wealth inequality in models with idiosyncratic investment risk through exaggerating labor earnings uncertainty, while inheritance decreases wealth inequality in the Becker and Tomes (1979) model through mitigating labor earnings uncertainty. This causes estate taxes to have different impacts on wealth inequality in my model and the Becker and Tomes (1979) model.

Suggested Citation

  • Shenghao Zhu, 2019. "A Becker–Tomes model with investment risk," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 67(4), pages 951-981, June.
    • Handle: RePEc:spr:joecth:v:67:y:2019:i:4:d:10.1007_s00199-018-1103-2
    DOI: 10.1007/s00199-018-1103-2
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    2. Matthias Birkner & Niklas Scheuer & Klaus Wälde, 2023. "The dynamics of Pareto distributed wealth in a small open economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(2), pages 607-644, August.

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    More about this item

    Keywords

    Investment risk; Estate taxes; Bequest motives; Wealth inequality; The Becker–Tomes model;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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