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The Effect of Aspirations, Habits, and Social Security on the Distribution of Wealth

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  • Jordi Caballé
  • Ana I. Moro-Egido

Abstract

In this paper, we analyze how the introduction of habits and aspirations affects the distribution of wealth when individuals labor productivity is subject to idiosyncratic shocks and bequests arise from a joy-of-giving motive. In the presence of either bequests or aspirations, labor income shocks are transmitted intergenerationally and this transmission, together with the contemporaneous income shocks, determines the stationary distribution of wealth. We show that the introduction of aspirations increases both the intragenerational variability of wealth and the corresponding degree of intergenerational mobility. The opposite result holds when habits are introduced. Finally, we discuss how aspirations and habits interact with the redistributive features of an unfunded social security system.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 352.

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Date of creation: Jun 2008
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Handle: RePEc:bge:wpaper:352

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Keywords: Aspirations; Habits; Wealth Distribution; Social Security;

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  8. A. Abel, 2010. "Asset prices under habit formation and catching up with the Jones," Levine's Working Paper Archive 1395, David K. Levine.
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  13. de la Croix, David, 1996. "The dynamics of bequeathed tastes," Economics Letters, Elsevier, vol. 53(1), pages 89-96, October.
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  16. Shleifer, Andrei & Summers, Lawrence H. & Bernheim, B. Douglas, 1986. "The Strategic Bequest Motive," Scholarly Articles 3721794, Harvard University Department of Economics.
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  18. Jaime Alonso-Carrera & Jordi Caballé & Xavier Raurich, 2004. "Aspirations, Habit Formation, and Bequest Motive," UFAE and IAE Working Papers 641.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  19. Mohamed Jellal & Francois-Charles Wolff, 2002. "Altruistic Bequests with Inherited Tastes," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 1(2), pages 95-113, August.
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  21. Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 90(3), pages 356-366, June.
  22. de la Croix, David, 1996. "Economic development and convergence clubs: the role of inherited tastes and human capital," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1996024, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Oct 1996.
  23. Jordi Caballé & Luisa Fuster, 2000. "Pay-as-you-go social security and the distribution of bequests," Economics Working Papers 468, Department of Economics and Business, Universitat Pompeu Fabra.
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Cited by:
  1. Francisco Alvarez-Cuadrado & Ngo Van Long, 2012. "Envy and Inequality," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(3), pages 949-973, 09.

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