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How Important is Discount Rate Heterogeneity for Wealth Inequaltity

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  • Hendricks, Lutz A.

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 around 0.07 to levels that are close to the data. The share of wealth held by the richest 1% of households rises by around 0.04, but falls short of the data by more than ten percentage points. Discount rate heterogeneity also helps account for the large wealth inequality observed among households with similar lifetime earnings.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 12724.

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Date of creation: 01 Jan 1970
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Publication status: Published in Journal of Economic Dynamics and Control, September 2007, vol. 31 no. 9, pp. 3042-3068
Handle: RePEc:isu:genres:12724

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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