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Distribution of Wealth and Incomplete Markets: Theory and Empirical Evidence

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Davide Fiaschi - Matteo Marsili

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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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Publisher Info
Paper provided by Dipartimento di Scienze Economiche (DSE), 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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Related research
Keywords: wealth distribution; incomplete markets; earnings distribution; capital income taxation; productivity shocks; portfolio diversification; nonparametric estimation;

Find related papers by JEL classification:
D1 - Microeconomics - - Household Behavior
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
D33 - Microeconomics - - Distribution - - - Factor Income Distribution
N30 - Economic History - - Labor and Consumers, Demography, Education, Income, and Wealth - - - General, International, or Comparative

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  6. Orazio P. Attanasio & Agar Brugiavini, 2003. "Social Security And Households' Saving," The Quarterly Journal of Economics, MIT Press, vol. 118(3), pages 1075-1119, August. [Downloadable!] (restricted)
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  8. Chang, Fwu-Ranq, 1988. "The Inverse Optimal Problem: A Dynamic Programming Approach," Econometrica, Econometric Society, vol. 56(1), pages 147-72, January. [Downloadable!] (restricted)
  9. Castaldi, Carolina & Milakovic, Mishael, 2007. "Turnover activity in wealth portfolios," Journal of Economic Behavior & Organization, Elsevier, vol. 63(3), pages 537-552, July. [Downloadable!] (restricted)
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  10. Laitner, John, 1979. "Household Bequest Behaviour and the National Distribution of Wealth," Review of Economic Studies, Blackwell Publishing, vol. 46(3), pages 467-83, July. [Downloadable!] (restricted)
  11. Laitner, John, 2001. "Secular Changes in Wealth Inequality and Inheritance," Economic Journal, Royal Economic Society, vol. 111(474), pages 691-721, October. [Downloadable!] (restricted)
  12. Monica Paiella, 2004. "Does wealth affect consumption? Evidence for Italy," Temi di discussione (Economic working papers) 510, Bank of Italy, Economic Research Department. [Downloadable!]
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  13. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August. [Downloadable!] (restricted)
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