Relative capital accumulation with heterogeneous individuals
AbstractThe purpose of this paper is to show how differences in individualsâ€™ labour productivities cause differences in their accumulation of capital, and thereby analysing the evolution of the income distribution. There are three cases of interest: (i) the high productive accumulate relatively more capital [growing inequality], (ii) no individual accumulates relatively more capital [neutrality], (iii) the low productive accumulate relatively more [diminishing inequality]. Which of these cases is generated depends on the price dynamics (the growth rate of wages and the level of the interest rate relative to the rate of time preference), together with the preferences for consumption. The exact conditions for the price dynamics to generate (i), (ii) and (iii) are derived. Furthermore, since the price dynamics is endogenous in general equilibrium, we find the conditions for preferences and technology that determine relative capital accumulation. We find (in general equilibrium) that growing economies typically cause the high productive to accumulate more capital than the low productive if preferences are Decreasing Absolute Risk Aversion, and shrinking economies cause the less productive to accumulate more (i.e. decumulate less). The relations are reversed for Constant and Increasing Relative Risk Aversion. The final part of the paper analyses the effects of capital taxation on the income distribution.
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Bibliographic InfoPaper provided by Durham University Business School in its series Working Papers with number 2009_06.
Date of creation: 01 Dec 2009
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Consumer heterogeneity; income distribution dynamics; relative capital accumulation; taxation.;
Find related papers by JEL classification:
- E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- D33 - Microeconomics - - Distribution - - - Factor Income Distribution
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
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