Entrepreneurs, Managers and Inequality
AbstractSince the 1980s, the U.S. income distribution has become considerably more concentrated toward the top while the wealth distribution has not. I argue that this can be accounted for by occupational shifts caused by the decline in tax progressivity. To show this, I construct a dynamic general equilibrium model of occupational choice which distinguishes between entrepreneurs, who run their own firms, and managers, who run publicly owned firms. Collateral constraints induce entrepreneurs to hold more wealth, while managers earn higher wages as a result of competitive assignments to firms. Feeding observed tax policy changes from 1970 to 2000 into the model, I find that (i) less progressive taxation increases the relative mass of managers in equilibrium, and explains approximately 30% of the observed increase in the concentrations of earnings and income without increasing that of wealth, and (ii) reverting to historical tax policies has only a negligible impact on consumption equivalent welfare.
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Bibliographic InfoPaper provided by University of Mannheim, Department of Economics in its series Working Papers with number 12-15.
Date of creation: 2012
Date of revision:
Find related papers by JEL classification:
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-09-22 (All new papers)
- NEP-DGE-2012-09-22 (Dynamic General Equilibrium)
- NEP-ENT-2012-09-22 (Entrepreneurship)
- NEP-PBE-2012-09-22 (Public Economics)
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