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Stochastic dominance and thick-tailed wealth distributions

Author

Listed:
  • Christian Pietro

    () (University of Salerno)

  • Marco M. Sorge

    () (University of Salerno
    University of Göttingen)

Abstract

Abstract Right-skewed and thick-tailed wealth distributions have been documented as an empirical regularity across space and time. A key mechanism for explaining these distributional features is proportional random growth. We investigate the comparative statics of a well-defined class of random growth models when allowing for stochastically ordered shifts in the wealth return process. An order-contingent monotone comparative statics property is identified, according to which pure increases in risk (e.g. higher volatility of capital returns) foster top wealth concentration whereas first-order stochastically dominated shifts in the return process (induced by e.g. proportional capital income taxation) rather lower inequality at the upper end of the distribution. Our analysis points to the potentially ambiguous effects on top wealth inequality of introducing or modifying capital income tax treatments in the presence of stochastic returns.

Suggested Citation

  • Christian Pietro & Marco M. Sorge, 2018. "Stochastic dominance and thick-tailed wealth distributions," Journal of Economics, Springer, vol. 123(2), pages 141-159, March.
  • Handle: RePEc:kap:jeczfn:v:123:y:2018:i:2:d:10.1007_s00712-017-0544-6
    DOI: 10.1007/s00712-017-0544-6
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    References listed on IDEAS

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    More about this item

    Keywords

    Wealth distribution; Thick tails; Stochastic dominance ordering;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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