Distribution of wealth and incomplete markets: Theory and empirical evidence
This paper analyses the equilibrium distribution of wealth in an economy where firms’ productivities are subject to idiosyncratic shocks, returns on factors are determined in competitive markets, households have linear consumption functions and government imposes taxes on capital and labour incomes and equally redistributes the collected resources to households. 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. The characteristics of the labour market crucially affects the bottom tail, but not the upper tail of the distribution of wealth in the case of completely decentralized labour market. The analysis also suggests a positive relationship between growth and wealth inequality. The theoretical predictions find a corroboration in the empirical evidence of United States in the period 1989–2004.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- repec:ebl:ecbull:v:28:y:2004:i:18:p:a0 is not listed on IDEAS
- Tullio Jappelli & Luigi Pistaferri, 1999.
"The Dynamics of Household Wealth Accumulation in Italy,"
CSEF Working Papers
27, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Dec 2000.
- Tullio Jappelli & Luigi Pistaferri, 2000. "The dynamics of household wealth accumulation in Italy," Fiscal Studies, Institute for Fiscal Studies, vol. 21(2), pages 269-295, June.
- Davies, James B. & Shorrocks, Anthony F., 2000. "The distribution of wealth," Handbook of Income Distribution, in: A.B. Atkinson & F. Bourguignon (ed.), Handbook of Income Distribution, edition 1, volume 1, chapter 11, pages 605-675 Elsevier.
- Arthur B. Kennickell, 2003. "A rolling tide: changes in the distribution of wealth in the U.S., 1989-2001," Finance and Economics Discussion Series 2003-24, Board of Governors of the Federal Reserve System (U.S.).
- Xavier Gabaix, 2005.
"The Granular Origins of Aggregate Fluctuations,"
2005 Meeting Papers
470, Society for Economic Dynamics.
- Monica Paiella, 2004.
"Does wealth affect consumption? Evidence for Italy,"
Temi di discussione (Economic working papers)
510, Bank of Italy, Economic Research and International Relations Area.
- Paiella, Monica, 2007. "Does wealth affect consumption? Evidence for Italy," Journal of Macroeconomics, Elsevier, vol. 29(1), pages 189-205, March.
- Laitner, John, 1979. "Household Bequest Behaviour and the National Distribution of Wealth," Review of Economic Studies, Wiley Blackwell, vol. 46(3), pages 467-83, July.
- Marco Cagetti & Mariacristina De Nardi, 2005.
"Wealth inequality: data and models,"
Working Paper Series
WP-05-10, Federal Reserve Bank of Chicago.
- Thomas Piketty & Gilles Postel-Vinay & Jean-Laurent Rosenthal, 2006.
"Wealth Concentration in a Developing Economy: Paris and France, 1807–1994,"
American Economic Review,
American Economic Association, vol. 96(1), pages 236-256, March.
- Piketty, Thomas & Postel-Vinay, Gilles & Rosenthal, Jean Laurent, 2004. "Wealth Concentration in a Developing Economy: Paris and France, 1807-1994," CEPR Discussion Papers 4631, C.E.P.R. Discussion Papers.
- Thomas Piketty & Gilles Postel-Vinay & Jean-Laurent Rosenthal, 2005. "Wealth concentration in a developing economy : Paris and France, 1807-1994," Research Unit Working Papers 0504, Laboratoire d'Economie Appliquee, INRA.
- Thomas Piketty & Gilles Postel-Vinay & Jean-Laurent Rosenthal, 2006. "Wealth concentration ina developing economy: Paris and France, 1807-1994," Post-Print halshs-00754643, HAL.
- Charles I. Jones, 2003. "Growth, capital shares, and a new perspective on production functions," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
- Stiglitz, Joseph E, 1969.
"Distribution of Income and Wealth among Individuals,"
Econometric Society, vol. 37(3), pages 382-97, July.
- Joseph E. Stiglitz, 1967. "Distribution of Income and Wealth Among Individuals," Cowles Foundation Discussion Papers 238, Cowles Foundation for Research in Economics, Yale University.
- Laitner, John, 2001.
"Secular Changes in Wealth Inequality and Inheritance,"
Royal Economic Society, vol. 111(474), pages 691-721, October.
- John Laitner, 2001. "Secular Changes in Wealth Inequality and Inheritance," Working Papers wp020, University of Michigan, Michigan Retirement Research Center.
- Jappelli, Tullio & Pistaferri, Luigi, 1997.
"Using Subjective Income Expectations to Test for Excess Sensitivity of Consumption to Predicted Income Growth,"
CEPR Discussion Papers
1617, C.E.P.R. Discussion Papers.
- Jappelli, Tullio & Pistaferri, Luigi, 2000. "Using subjective income expectations to test for excess sensitivity of consumption to predicted income growth," European Economic Review, Elsevier, vol. 44(2), pages 337-358, February.
- Luigi Pistaferri & Tullio Jappelli, 1998. "Using Subjective Income Expectations to Test for Excess Sensitivity of Consumption to Predicted Income Growth," CSEF Working Papers 12, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
- Castaldi, Carolina & Milakovic, Mishael, 2007.
"Turnover activity in wealth portfolios,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 63(3), pages 537-552, July.
- Shorrocks, A F, 1975. "On Stochastic Models of Size Distributions," Review of Economic Studies, Wiley Blackwell, vol. 42(4), pages 631-41, October.
- Klass, Oren S. & Biham, Ofer & Levy, Moshe & Malcai, Ofer & Solomon, Sorin, 2006. "The Forbes 400 and the Pareto wealth distribution," Economics Letters, Elsevier, vol. 90(2), pages 290-295, February.
- Wang, Neng, 2007. "An equilibrium model of wealth distribution," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1882-1904, October.
- Arthur B. Kennickell, 2003. "A Rolling Tide: Changes in the Distribution of Wealth in the US, 1989-2001," Economics Working Paper Archive wp_393, Levy Economics Institute.
- Jess Benhabib & Alberto Bisin & Shenghao Zhu, 2011.
"The Distribution of Wealth and Fiscal Policy in Economies With Finitely Lived Agents,"
Econometric Society, vol. 79(1), pages 123-157, 01.
- Jess Benhabib & Alberto Bisin, 2009. "The distribution of wealth and fiscal policy in economies with finitely lived agents," NBER Working Papers 14730, National Bureau of Economic Research, Inc.
- Chang, Fwu-Ranq, 1988. "The Inverse Optimal Problem: A Dynamic Programming Approach," Econometrica, Econometric Society, vol. 56(1), pages 147-72, January.
- Pestieau, Pierre & Possen, Uri M, 1979. "A Model of Wealth Distribution," Econometrica, Econometric Society, vol. 47(3), pages 761-72, May.
- Victor M. Yakovenko & J. Barkley Rosser, 2009. "Colloquium: Statistical mechanics of money, wealth, and income," Papers 0905.1518, arXiv.org, revised Dec 2009.
- Neri Salvadori, 2004. "Economic growth and distribution: on the nature and causes of the wealth of nations," Economics Bulletin, AccessEcon, vol. 28(18), pages A0.
- Davide Fiaschi - Matteo Marsili, 2009.
"Distribution of Wealth and Incomplete Markets: Theory and Empirical Evidence,"
2009/83, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
- 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.
- 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.
- Aiyagari, S Rao, 1994.
"Uninsured Idiosyncratic Risk and Aggregate Saving,"
The Quarterly Journal of Economics,
MIT Press, vol. 109(3), pages 659-84, August.
- Makoto Nirei & Wataru Souma, 2007. "A Two Factor Model Of Income Distribution Dynamics," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 53(3), pages 440-459, 09.
- Kenneth Arrow, 1996. "The economics of information: An exposition," Empirica, Springer, vol. 23(2), pages 119-128, June.
- Levy, Moshe, 2003. "Are rich people smarter?," Journal of Economic Theory, Elsevier, vol. 110(1), pages 42-64, May.
- Arthur B. Kennickell, 2003. "A Rolling Tide: Changes in the Distribution of Wealth in the U.S., 1989-2001," Others 0311002, EconWPA.
When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:81:y:2012:i:1:p:243-267. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.