This article argues that a satisfactory theory of wealth inequality should account not only for the marginal distribution of wealth, but also for the joint distribution of wealth and earnings. The paper describes the joint distribution of retirement wealth and lifetime earnings in the Panel Study of Income Dynamics. It then evaluates the ability of a stochastic life-cycle model to account for key features of this distribution. The life-cycle model fails to account for three key features of the data. (i) The correlation between lifetime earnings and retirement wealth is too high. (ii) The wealth gaps between earnings rich and earnings poor households are too large. (iii) Wealth inequality among households with similar lifetime earnings is too small. Models in which households differ in rates of return or time preferences account much better for the joint distribution of retirement wealth and lifetime earnings.
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number
12668.
Length: Date of creation: 26 Aug 2006 Date of revision: Publication status: Forthcoming in International Economic Review. Handle: RePEc:isu:genres:12668
Contact details of provider: Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070 Phone: +1 515.294.6741 Fax: +1 515.294.0221 Email: Web page: http://www.econ.iastate.edu More information through EDIRC
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Lutz Hendricks, 2007.
"Retirement Wealth And Lifetime Earnings,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(2), pages 421-456, 05.
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Find related papers by JEL classification: E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment