IDEAS home Printed from https://ideas.repec.org/a/red/issued/04-102.html
   My bibliography  Save this article

Increasing Returns to Savings and Wealth Inequality

Author

Listed:
  • Claudio Campanale

    (University of Alicante)

Abstract

In this paper I present an explanation to the fact that in the data wealth is substantially more concentrated than income. Starting from the observation that the composition of households' portfolios changes towards a larger share of high-yield assets as the level of net worth increases, I first use data on historical asset returns and portfolio composition by wealth level to construct an empirical return function. I then augment an Overlapping Generation version of the standard neoclassical growth model with idiosyncratic labor income risk and missing insurance markets to allow for returns to savings to be increasing in the level of accumulated assets. The quantitative properties of the model are examined and show that an empirically plausible difference between the return faced by poor and wealthy agents is able to generate a substantial increase in wealth inequality compared to the basic model, enough to match the Gini index and all but the top 1 percentile of the U.S. distribution of wealth. (Copyright: Elsevier)

Suggested Citation

  • Claudio Campanale, 2007. "Increasing Returns to Savings and Wealth Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 646-675, October.
  • Handle: RePEc:red:issued:04-102
    DOI: 10.1016/j.red.2007.02.003
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1016/j.red.2007.02.003
    Download Restriction: Access to full texts is restricted to ScienceDirect subscribers and institutional members. See http://www.sciencedirect.com/ for details.

    File URL: https://libkey.io/10.1016/j.red.2007.02.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Christopher D Carroll, 1997. "Why Do the Rich Save So Much?," Economics Working Paper Archive 388, The Johns Hopkins University,Department of Economics.
    2. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
    3. Vincenzo Quadrini, 2000. "Entrepreneurship, Saving and Social Mobility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 1-40, January.
    4. Hubbard, R Glenn & Skinner, Jonathan & Zeldes, Stephen P, 1995. "Precautionary Saving and Social Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 360-399, April.
    5. Hansen, G D, 1993. "The Cyclical and Secular Behaviour of the Labour Input: Comparing Efficiency Units and Hours Worked," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(1), pages 71-80, Jan.-Marc.
    6. repec:ete:ceswps:ces9805 is not listed on IDEAS
    7. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2004. "The Role of Social Capital in Financial Development," American Economic Review, American Economic Association, vol. 94(3), pages 526-556, June.
    8. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 659-684.
    9. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
    10. Mariacristina De Nardi, 2004. "Wealth Inequality and Intergenerational Links," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(3), pages 743-768.
    11. Huggett, Mark & Ventura, Gustavo, 2000. "Understanding why high income households save more than low income households," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 361-397, April.
    12. Ana Castaneda & Javier Diaz-Gimenez & Jose-Victor Rios-Rull, 2003. "Accounting for the U.S. Earnings and Wealth Inequality," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 818-857, August.
    13. Ravi Jagannathan & Ellen R. McGrattan & Anna Scherbina, 2000. "The declining U.S. equity premium," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Fall), pages 3-19.
    14. William M. Gentry & R. Glenn Hubbard, 2000. "Entrepreneurship and Household Saving," NBER Working Papers 7894, National Bureau of Economic Research, Inc.
    15. Michael Hurd & James P. Smith, 2002. "Expected Bequests and Their Distribution," NBER Working Papers 9142, National Bureau of Economic Research, Inc.
    16. Javier Diaz-Gimenez & Vincenzo Quadrini & José-Víctor Ríos-Rull & Santiago Budria Rodriguez, 2002. "Updated facts on the U.S. distributions of earnings, income, and wealth," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 26(Sum), pages 2-35.
    17. Diaz-Gimenez, Javier & Prescott, Edward C. & Fitzgerald, Terry & Alvarez, Fernando, 1992. "Banking in computable general equilibrium economies," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 533-559.
    18. William Goetzmann & Matthew Spiegel, 2000. "The Policy Implications of Portfolio Choice in Underserved Mortgage Markets," Yale School of Management Working Papers ysm161, Yale School of Management, revised 01 Mar 2001.
    19. Marco Cagetti & Mariacristina De Nardi, 2006. "Entrepreneurship, Frictions, and Wealth," Journal of Political Economy, University of Chicago Press, vol. 114(5), pages 835-870, October.
    20. Marimon, Ramon & Scott, Andrew (ed.), 1999. "Computational Methods for the Study of Dynamic Economies," OUP Catalogue, Oxford University Press, number 9780198294979.
    21. David Domeij & Paul Klein, 2002. "Private Pensions: To What Extent Do They Account for Swedish Wealth Inequality?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(3), pages 503-534, July.
    22. Harrison Hong & Jeffrey D. Kubik & Jeremy C. Stein, 2001. "Social Interaction and Stock-Market Participation," NBER Working Papers 8358, National Bureau of Economic Research, Inc.
    23. Monica Paiella, 2001. "Limited financial market participation: a transaction cost-based explanation," IFS Working Papers W01/06, Institute for Fiscal Studies.
    24. John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, June.
    25. Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," American Economic Review, American Economic Association, vol. 92(4), pages 745-778, September.
    26. Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," The Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 491-533.
    27. Solon, Gary, 1992. "Intergenerational Income Mobility in the United States," American Economic Review, American Economic Association, vol. 82(3), pages 393-408, June.
    28. Robert B. Barsky & F. Thomas Juster & Miles S. Kimball & Matthew D. Shapiro, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 537-579.
    29. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
    30. Juan C. Conesa & Dirk Krueger, 1999. "Social Security Reform with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 757-795, October.
    31. Carol C. Bertaut & Martha Starr-McCluer, 2000. "Household portfolios in the United States," Finance and Economics Discussion Series 2000-26, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Henri Njangang & Alim Beleck & Sosson Tadadjeu & Brice Kamguia, 2021. "Do ICTs drive wealth inequality? Evidence from a dynamic panel analysis," Research Africa Network Working Papers 21/057, Research Africa Network (RAN).
    2. Alisdair McKay, 2011. "Household Saving Behavior and Social Security Privatization," Boston University - Department of Economics - Working Papers Series WP2011-027, Boston University - Department of Economics.
    3. Vandermarliere, B. & Ryckebusch, J. & Schoors, K. & Cauwels, P. & Sornette, D., 2017. "Discrete hierarchy of sizes and performances in the exchange-traded fund universe," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 469(C), pages 111-123.
    4. Campanale, Claudio, 2016. "Wealth inequality under “keeping up with the Joneses” preferences," Economics Letters, Elsevier, vol. 145(C), pages 282-285.
    5. Sofía Bauducco, 2011. "Seigniorage and Distortionary Taxation in a Model with Heterogeneous Agents and Idiosyncratic Uncertainty," Working Papers Central Bank of Chile 611, Central Bank of Chile.
    6. Njangang, Henri & Asongu, Simplice A. & Tadadjeu, Sosson & Nounamo, Yann & Kamguia, Brice, 2022. "Governance in mitigating the effect of oil wealth on wealth inequality: A cross-country analysis of policy thresholds," Resources Policy, Elsevier, vol. 76(C).
    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. Henri Njangang & Alim Beleck & Sosson Tadadjeu & Brice Kamguia, 2021. "Do ICTs drive wealth inequality? Evidence from a dynamic panel analysis," Working Papers 21/057, European Xtramile Centre of African Studies (EXCAS).
    9. Maude Pugliese & David Pelletier & Céline Bourdais, 2023. "Separation and Savings in Tax-Favored Retirement Accounts Among Canadian Men and Women," Population Research and Policy Review, Springer;Southern Demographic Association (SDA), vol. 42(4), pages 1-33, August.
    10. Gu, Xinhua & Tam, Pui Sun, 2013. "The saving–growth–inequality triangle in China," Economic Modelling, Elsevier, vol. 33(C), pages 850-857.
    11. Simplice A. Asongu & Beatrice D. Simo-Kengne, 2022. "Demographic Change and Wealth Inequality: Global Evidence," Working Papers of the African Governance and Development Institute. 22/085, African Governance and Development Institute..
    12. Njangang, Henri & Beleck, Alim & Tadadjeu, Sosson & Kamguia, Brice, 2022. "Do ICTs drive wealth inequality? Evidence from a dynamic panel analysis," Telecommunications Policy, Elsevier, vol. 46(2).
    13. Henri Njangang & Alim Beleck & Sosson Tadadjeu & Brice Kamguia, 2021. "Do ICTs drive wealth inequality? Evidence from a dynamic panel analysis," Working Papers of the African Governance and Development Institute. 21/057, African Governance and Development Institute..
    14. James Best & Keshav Dogra, 2023. "Capital Management and Wealth Inequality," Staff Reports 1072, Federal Reserve Bank of New York.
    15. Macaulay, Alistair, 2021. "The attention trap: Rational inattention, inequality, and fiscal policy," European Economic Review, Elsevier, vol. 135(C).
    16. Tran, Anh & Wang, Pingle, 2023. "Barking up the wrong tree: Return-chasing in 401(k) plans," Journal of Financial Economics, Elsevier, vol. 148(1), pages 69-90.
    17. Oliver Denk & Robert P. Hagemann & Patrick Lenain & Valentin Somma, 2013. "Inequality and Poverty in the United States: Public Policies for Inclusive Growth," OECD Economics Department Working Papers 1052, OECD Publishing.
    18. Wei, Shang-Jin & Wu, Weixing & Zhang, Linwan, 2019. "Portfolio choices, Asset returns and wealth inequality: evidence from China," Emerging Markets Review, Elsevier, vol. 38(C), pages 423-437.
    19. Joachim Hubmer & Per Krusell & Anthony A. Smith Jr., 2020. "Sources of US Wealth Inequality: Past, Present, and Future," NBER Chapters, in: NBER Macroeconomics Annual 2020, volume 35, pages 391-455, National Bureau of Economic Research, Inc.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cagetti, Marco & De Nardi, Mariacristina, 2008. "Wealth Inequality: Data And Models," Macroeconomic Dynamics, Cambridge University Press, vol. 12(S2), pages 285-313, September.
    2. De Nardi, Mariacristina & Yang, Fang, 2014. "Bequests and heterogeneity in retirement wealth," European Economic Review, Elsevier, vol. 72(C), pages 182-196.
    3. Andreas Fagereng & Luigi Guiso & Davide Malacrino & Luigi Pistaferri, 2020. "Heterogeneity and Persistence in Returns to Wealth," Econometrica, Econometric Society, vol. 88(1), pages 115-170, January.
    4. Matthias Doepke & Martin Schneider, 2005. "Real effects of inflation through the redistribution of nominal wealth," Staff Report 355, Federal Reserve Bank of Minneapolis.
    5. Fang Yang, 2005. "Accounting for the heterogeneity in retirement wealth," Working Papers 638, Federal Reserve Bank of Minneapolis.
    6. Jess Benhabib & Alberto Bisin & Shenghao Zhu, 2011. "The Distribution of Wealth and Fiscal Policy in Economies With Finitely Lived Agents," Econometrica, Econometric Society, vol. 79(1), pages 123-157, January.
    7. Matthias Doepke, "undated". "Inflation as a Redistribution Shock: Effects on Aggregates and Welfare," UCLA Economics Online Papers 412, UCLA Department of Economics.
    8. Sagiri Kitao, 2008. "Entrepreneurship, taxation and capital investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 44-69, January.
    9. Krueger, D. & Mitman, K. & Perri, F., 2016. "Macroeconomics and Household Heterogeneity," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 843-921, Elsevier.
    10. Wei, Shang-Jin & Wu, Weixing & Zhang, Linwan, 2019. "Portfolio choices, Asset returns and wealth inequality: evidence from China," Emerging Markets Review, Elsevier, vol. 38(C), pages 423-437.
    11. Pavel Brendler & Moritz Kuhn & Ulrike I. Steins, 2024. "To Have or Not to Have: Understanding Wealth Inequality," Opportunity and Inclusive Growth Institute Working Papers 098, Federal Reserve Bank of Minneapolis.
    12. Clemens, Christiane & Heinemann, Maik, 2010. "On entrepreneurial risk-taking and the macroeconomic effects of financial constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1610-1626, September.
    13. Francis, Johanna L., 2009. "Wealth and the capitalist spirit," Journal of Macroeconomics, Elsevier, vol. 31(3), pages 394-408, September.
    14. Kaymak, Barıș & Leung, David & Poschke, Markus, 2020. "Accounting for Wealth Concentration in the US," IZA Discussion Papers 13082, Institute of Labor Economics (IZA).
    15. Panousi, Vasia, 2009. "Capital Taxation with Entrepreneurial Risk," MPRA Paper 24237, University Library of Munich, Germany.
    16. Hendricks, Lutz, 2007. "How important is discount rate heterogeneity for wealth inequality?," Journal of Economic Dynamics and Control, Elsevier, vol. 31(9), pages 3042-3068, September.
    17. De Nardi, Mariacristina & Yang, Fang, 2016. "Wealth inequality, family background, and estate taxation," Journal of Monetary Economics, Elsevier, vol. 77(C), pages 130-145.
    18. Marco Cozzi, 2012. "Risk Aversion Heterogeneity, Risky Jobs And Wealth Inequality," Working Paper 1286, Economics Department, Queen's University.
    19. Francisco Covas & Shigeru Fujita, 2007. "Private risk premium and aggregate uncertainty in the model of uninsurable investment risk," Working Papers 07-30, Federal Reserve Bank of Philadelphia.
    20. Campanale Claudio, 2018. "Luxury consumption, precautionary savings and wealth inequality," The B.E. Journal of Macroeconomics, De Gruyter, vol. 18(1), pages 1-15, January.

    More about this item

    Keywords

    Wealth inequality; Self-insurance; Portfolio composition; Increasing returns;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:issued:04-102. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.