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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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  1. 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), Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) 1996024, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES), revised 00 Oct 1996.
  2. Bernheim, B Douglas & Shleifer, Andrei & Summers, Lawrence H, 1985. "The Strategic Bequest Motive," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(6), pages 1045-76, December.
  3. de La Croix, D. & Michel, P., 1997. "Optimal Growth When Tastes Are Inherited," G.R.E.Q.A.M., Universite Aix-Marseille III 97a21, Universite Aix-Marseille III.
  4. Josep Pijoan-Mas 2 & Antonia Díaz & José-Víctor Ríos-Rull, 2001. "Habit Formation: Inplications For The Wealth Distribution," Economics Working Papers, Universidad Carlos III, Departamento de Economía we015114, Universidad Carlos III, Departamento de Economía.
  5. Christian Kleiber & Martin Sexauer & Klaus Waelde, 2006. "Bequests, Taxation and the Distribution of Wealth in a General Equilibrium Model," CESifo Working Paper Series, CESifo Group Munich 1723, CESifo Group Munich.
  6. David DE LA CROIX & Philippe MICHEL, 2001. "Altruism and Self-Restraint," Annales d'Economie et de Statistique, ENSAE, issue 63-64, pages 233-259.
  7. Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 356-366, June.
  8. Jellal, Mohamed & wolff, François charles, 2002. "Altruistic bequests with inherited tastes," MPRA Paper 38447, University Library of Munich, Germany.
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  10. Davies, James B, 1986. "Does Redistribution Reduce Inequality?," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 4(4), pages 538-59, October.
  11. Christopher D Carroll & Jody Overland & David N Weil, 1997. "Comparison Utility in a Growth Model," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 387, The Johns Hopkins University,Department of Economics.
  12. Jordi Caballe & Luisa Fuster, 2003. "Pay-as-you-go Social Security and the Distribution of Altruistic Transfers," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(3), pages 541-567, 07.
  13. de la Croix, David, 1996. "The dynamics of bequeathed tastes," Economics Letters, Elsevier, Elsevier, vol. 53(1), pages 89-96, October.
  14. Jaime Alonso-Carrera & Jordi Caballé & Xavier Raurich, 2004. "Consumption Externalities, Habit Formation and Equilibrium Efficiency," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 106(2), pages 231-251, 06.
  15. Donald Cox & Serena Ng & Andreas Waldkirch, 2000. "Intergenerational Linkages in Consumption Behavior," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 1791, Econometric Society, revised 08 Nov 2000.
  16. Cass, David, 1972. "On capital overaccumulation in the aggregative, neoclassical model of economic growth: A complete characterization," Journal of Economic Theory, Elsevier, Elsevier, vol. 4(2), pages 200-223, April.
  17. Alonso-Carrera, Jaime & Caballe, Jordi & Raurich, Xavier, 2005. "Growth, habit formation, and catching-up with the Joneses," European Economic Review, Elsevier, Elsevier, vol. 49(6), pages 1665-1691, August.
  18. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  19. Jaime Alonso-Carrera & Jordi Caballé & Xavier Raurich, 2004. "Aspirations, Habit Formation, and Bequest Motive," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 641.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  20. Christopher D. Carroll & Jody Overland & David N. Weil, 1995. "Saving and growth with habit formation," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 95-42, Board of Governors of the Federal Reserve System (U.S.).
  21. Jordi Caballé & Luisa Fuster, 2000. "Pay-as-you-go social security and the distribution of bequests," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 468, Department of Economics and Business, Universitat Pompeu Fabra.
  22. Abel, Andrew B, 1986. "Capital Accumulation and Uncertain Lifetimes with Adverse Selection," Econometrica, Econometric Society, Econometric Society, vol. 54(5), pages 1079-97, September.
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Cited by:
  1. Francisco Alvarez-Cuadrado & Ngo Van Long, 2009. "Envy And Inequality," Departmental Working Papers, McGill University, Department of Economics 2009-03, McGill University, Department of Economics.

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