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The distribution of wealth and fiscal policy in economies with finitely lived agents

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  • Jess Benhabib
  • Alberto Bisin

Abstract

We study the dynamics of the distribution of overlapping generation economy with finitely lived agents and inter-generational transmission of wealth. Financial markets are incomplete, exposing agents to both labor income and capital income risk. We show that the stationary wealth distribution is a Pareto distribution in the right tail and that it is capital income risk, rather than labor income, that drives the properties of the right tail of the wealth distribution. We also study analytically the dependence of the distribution of wealth, of wealth inequality in particular, on various fiscal policy instruments like capital income taxes and estate taxes. We show that capital income and estate taxes can significantly reduce wealth inequality. Finally, we characterize optimal redistributive taxes with respect to a utilitarian social welfaremeasure. Social welfare is maximized short of minimal wealth inequality and with zero estate taxes. Finally, we study the effects of different degrees of social mobility on the wealth distribution.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14730.

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Date of creation: Feb 2009
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Handle: RePEc:nbr:nberwo:14730

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Citations

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Cited by:
  1. Robert E. Lucas, Jr. & Benjamin Moll, 2011. "Knowledge Growth and the Allocation of Time," NBER Working Papers 17495, National Bureau of Economic Research, Inc.
  2. Dan Cao & Daron Acemoglu, 2011. "Innovation by Entrants and Incumbents," 2011 Meeting Papers 473, Society for Economic Dynamics.
  3. Fiaschi, Davide & Marsili, Matteo, 2012. "Distribution of wealth and incomplete markets: Theory and empirical evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 81(1), pages 243-267.
  4. Wan, Jing & Zhu, Shenghao, 2012. "Intergenerational links, taxation, and wealth distribution," MPRA Paper 39511, University Library of Munich, Germany.
  5. Zhu, Shenghao, 2013. "Comparisons of stationary distributions of linear models," Economics Letters, Elsevier, vol. 119(2), pages 221-223.
  6. Anirban Chakraborti & Ioane Muni Toke & Marco Patriarca & Frédéric Abergel, 2011. "Econophysics: agent-based models," Post-Print hal-00621059, HAL.
  7. Alisdair McKay, 2013. "Search for Financial Returns and Social Security Privatization," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(2), pages 253-270, April.
  8. Jess Benhabib & Chetan Dave, . "Learning, Large Deviations and Rare Events," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
  9. Takashi Kamihigashi & John Stachurski, 2013. "Stochastic Stability in Monotone Economies," Discussion Paper Series DP2013-02, Research Institute for Economics & Business Administration, Kobe University.
  10. Aoki, Shuhei & Nirei, Makoto, 2013. "Pareto Distributions and the Evolution of Top Incomes in the U.S," MPRA Paper 47967, University Library of Munich, Germany.
  11. Jess Benhabib, 2009. "A Note on Regime Switching, Monetary Policy, and Multiple Equilibria," NBER Working Papers 14770, National Bureau of Economic Research, Inc.

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