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Economic interactions and the distribution of wealth

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  • Davide Fiaschi
  • Matteo Marsili

Abstract

This paper analyzes the equilibrium distribution of wealth in an economy where firms' productivities are subject to idiosyncratic shocks, returns on factors are determined in competitive markets, dynasties have linear consumption functions and government imposes taxes on capital and labour incomes and equally redistributes the collected resources to dynasties. The equilibrium distribution of wealth is explicitly calculated and its shape crucially depends on market incompleteness. In particular, a Paretian law in the top tail only arises if capital markets are incomplete. The Pareto exponent depends on the saving rate, on the net return on capital, on the growth rate of population and on portfolio diversification. On the contrary, the characteristics of the labour market mostly affects the bottom tail of the distribution of wealth. The analysis also suggests a positive relationship between growth and wealth inequality.

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File URL: http://arxiv.org/pdf/0906.1512
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Paper provided by arXiv.org in its series Papers with number 0906.1512.

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Date of creation: Jun 2009
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Handle: RePEc:arx:papers:0906.1512

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Web page: http://arxiv.org/

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  1. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 79(3), pages 733-772, 05.
  2. Klass, Oren S. & Biham, Ofer & Levy, Moshe & Malcai, Ofer & Solomon, Sorin, 2006. "The Forbes 400 and the Pareto wealth distribution," Economics Letters, Elsevier, vol. 90(2), pages 290-295, February.
  3. Fiaschi, Davide & Marsili, Matteo, 2012. "Distribution of wealth and incomplete markets: Theory and empirical evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 81(1), pages 243-267.
  4. Davies, James B. & Shorrocks, Anthony F., 2000. "The distribution of wealth," Handbook of Income Distribution, Elsevier, in: A.B. Atkinson & F. Bourguignon (ed.), Handbook of Income Distribution, edition 1, volume 1, chapter 11, pages 605-675 Elsevier.
  5. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
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