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How Important is Discount Rate Heterogeneity for Wealth Inequality?

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Author Info
Lutz Hendricks ()

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Abstract

This paper investigates the role of discount rate heterogeneity for wealth inequality. The key idea is to infer the distribution of preference parameters from the observed age profile of wealth inequality. The contribution of preference heterogeneity to wealth inequality can then be measured using a quantitative life-cycle model. I find that discount rate heterogeneity increases the Gini coefficient of wealth by 0.06 to 0.11. The share of wealth held by the richest 1% of households rises by 0.03 to 0.13. The larger changes occur when altruistic bequests are large and when preferences are strongly persistent across generations. Discount rate heterogeneity also helps account for the large wealth inequality observed among households with similar lifetime earnings.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 1604.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1604

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Related research
Keywords: wealth inequality; preference heterogeneity;

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Find related papers by JEL classification:
E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  12. Steven F. Venti & David A. Wise, 2000. "Choice, Chance, and Wealth Dispersion at Retirement," NBER Working Papers 7521, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Ana Castaneda & Javier Diaz-Gimenez & Jose-Victor Rios-Rull, 2003. "Accounting for the U.S. Earnings and Wealth Inequality," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 818-857, August. [Downloadable!] (restricted)
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  16. Hendricks, Lutz A., 2006. "The Intergenerational Persistence of Lifetime Earnings," Staff General Research Papers 12669, Iowa State University, Department of Economics.
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  21. Trostel, Philip A, 1993. "The Effect of Taxation on Human Capital," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 327-50, April. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mathias Sommer, 2008. "Understanding the trends in income, consumption and wealth inequality and how important are life-cycle effects?," MEA discussion paper series 08160, Mannheim Research Institute for the Economics of Aging (MEA), University of Mannheim. [Downloadable!]
  2. Matteo Iacoviello & Marina Pavan, 2007. "An Equilibrium Model of Lumpy Housing Investment," Rivista di Politica Economica, SIPI Spa, vol. 97(2), pages 15-44, March-Apr. [Downloadable!]
  3. Mendicino, Caterina, 2008. "On the amplification role of collateral constraints," MPRA Paper 9425, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  4. Daniel R. Carroll & Eric R. Young, 2009. "The Stationary Distribution of Wealth under Progressive Taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 469-478, July. [Downloadable!] (restricted)
    Other versions:
  5. Kazuo Mino & Yasuhiro Nakamoto, 2008. "Progressive Taxation, Wealth Distribution, and Macroeconomic Stability," Discussion Papers in Economics and Business 08-22, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP). [Downloadable!]
  6. Jess Benhabib & Shenghao Zhu, 2008. "Age, Luck, and Inheritance," NBER Working Papers 14128, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Sommer, Mathias, 2008. "Understanding the trends in income, consumption and wealth inequality and how important are life-cycle effects?," Sonderforschungsbereich 504 Publications 08-12, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
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