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Increasing Returns to Saving and Wealth Inequality

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  • Claudio Campanale

    ()
    (Departamento de Fundamentos del Analisis Economico, Universidad de Alicante)

Abstract

In this paper I present an explanation to the fact that in the data wealth is substantially more concentrated than income. Starting from the observation that the composition of households’ portfolios changes towards a larger share of high-yield assets as the level of net worth increases, I ?rst use data on historical asset returns and portfolio composition by wealth level to construct an empirical return function. I then augment an Overlapping Generation version of the standard neoclassical growth model with idiosyncratic labor income risk and missing insurance markets to allow for returns to savings to be increasing in the level of accumulated assets. The quantitative properties of the model are examined and show that an empirically plausible di?erence between the return faced by poor and wealthy agents is able to generate a substantial increase in wealth inequality compared to the basic model, enough to match the Gini index and all but the top 1 percentiles of the U.S. distribution of wealth.

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Bibliographic Info

Paper provided by Center for Research on Pensions and Welfare Policies, Turin (Italy) in its series CeRP Working Papers with number 45.

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Length: 40 pages
Date of creation: Nov 2005
Date of revision:
Handle: RePEc:crp:wpaper:45

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Keywords: Wealth inequality; self-insurance; portfolio composition; increasing returns;

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References

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Citations

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Cited by:
  1. Sofía Bauducco, 2011. "Seigniorage and Distortionary Taxation in a Model with Heterogeneous Agents and Idiosyncratic Uncertainty," Working Papers Central Bank of Chile, Central Bank of Chile 611, Central Bank of Chile.
  2. Alisdair McKay, 2013. "Search for Financial Returns and Social Security Privatization," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(2), pages 253-270, April.
  3. Alisdair McKay, 2011. "Household Saving Behavior and Social Security Privatization," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2011-027, Boston University - Department of Economics.
  4. Oliver Denk & Robert P. Hagemann & Patrick Lenain & Valentin Somma, 2013. "Inequality and Poverty in the United States: Public Policies for Inclusive Growth," OECD Economics Department Working Papers, OECD Publishing 1052, OECD Publishing.
  5. Gu, Xinhua & Tam, Pui Sun, 2013. "The saving–growth–inequality triangle in China," Economic Modelling, Elsevier, Elsevier, vol. 33(C), pages 850-857.

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