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Distribution of Wealth and Incomplete Markets: Theory and Empirical Evidence

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  • Davide Fiaschi - Matteo Marsili

Abstract

This paper analyzes the equilibrium distribution of wealth in an economy where firms’ productivities are subject to idiosyncratic shocks, returns on factors are determined in competitive markets, dynasties have linear consumption functions and government imposes taxes on capital and labour incomes and equally redistributes the collected resources to dynasties. The equilibrium distribution of wealth is explicitly calculated and its shape crucially depends on market incompleteness. With incomplete markets it follows a Paretian law in the top tail and the Pareto exponent depends on the saving rate, on the net return on capital, on the growth rate of population and on portfolio diversification. On the contrary, the characteristics of the labour market mostly a effects the bottom tail of the distribution of wealth. The analysis also suggests a positive relationship between growth and wealth inequality. The theoretical predictions find a corroboration in the empirical evidence of Italy and United States in the period 1987-2004.

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Bibliographic Info

Paper provided by Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy in its series Discussion Papers with number 2009/83.

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Date of creation: 20 Apr 2009
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Handle: RePEc:pie:dsedps:2009/83

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Keywords: wealth distribution; incomplete markets; earnings distribution; capital income taxation; productivity shocks; portfolio diversification; nonparametric estimation;

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Citations

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Cited by:
  1. Thomas Piketty, 2011. "On the Long-Run Evolution of Inheritance: France 1820--2050," The Quarterly Journal of Economics, Oxford University Press, vol. 126(3), pages 1071-1131.
  2. Manuela Gussoni - Andrea Mangani, 2009. "The impact of public funding for innovation on firms' R&D investments: Do R&D cooperation and appropriability matter?," Discussion Papers 2009/90, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  3. Davide Fiaschi & Matteo Marsili, 2009. "Economic interactions and the distribution of wealth," Papers 0906.1512, arXiv.org.
  4. Davide Fiaschi - Matteo Marsili, 2009. "Distribution of Wealth and Incomplete Markets: Theory and Empirical Evidence," Discussion Papers 2009/83, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  5. Luciano Fanti & Luca Gori, 2009. "Endogenous lifetime in an overlapping generations small open economy," Discussion Papers 2009/92, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  6. Anand Banerjee & Victor M. Yakovenko, 2009. "Universal patterns of inequality," Papers 0912.4898, arXiv.org, revised Apr 2010.
  7. Luciano Fanti & Luca Gori, 2009. "Endogenous fertility, endogenous lifetime and economic growth: the role of health and child policies," Discussion Papers 2009/91, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.

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