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The Effect of Aspirations, Habits, and Social Security on the Distribution of Wealth

In this paper, we analyze how the introduction of habits and aspirations affects the distribution of wealth when individuals' labor productivity is subject to idiosyncratic shocks and bequests arise from a joy-of-giving motive. In the presence of either bequests or aspirations, labor income shocks are transmitted intergenerationally and this transmission, together with the contemporaneous income shocks, determines the stationary distribution of wealth. We show that the introduction of aspirations increases both the intragenerational variability of wealth and the corresponding degree of intergenerational mobility. The opposite result holds when habits are introduced. Finally, we discuss how aspirations and habits interact with the redistributive features of an unfunded social security system.

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Paper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 761.08.

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Length: 27
Date of creation: 01 Jun 2008
Date of revision:
Handle: RePEc:aub:autbar:761.08
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  1. Bernheim, B Douglas & Shleifer, Andrei & Summers, Lawrence H, 1985. "The Strategic Bequest Motive," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1045-76, December.
  2. Andrew B. Abel, 1990. "Asset Prices under Habit Formation and Catching up with the Joneses," NBER Working Papers 3279, National Bureau of Economic Research, Inc.
  3. Sexauer, Martin & Kleiber, Christian & Wälde, Klaus, 2005. "Bequests, taxation and the distribution of wealth in a general equilibrium model," W.E.P. - Würzburg Economic Papers 61, University of Würzburg, Chair for Monetary Policy and International Economics.
  4. Alonso-Carrera, Jaime & Caballe, Jordi & Raurich, Xavier, 2005. "Growth, habit formation, and catching-up with the Joneses," European Economic Review, Elsevier, vol. 49(6), pages 1665-1691, August.
  5. Jaime Alonso-Carrera & Jordi Caballé & Xavier Raurich, 2004. "Aspirations, Habit Formation, and Bequest Motive," UFAE and IAE Working Papers 641.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  6. Cass, David, 1972. "On capital overaccumulation in the aggregative, neoclassical model of economic growth: A complete characterization," Journal of Economic Theory, Elsevier, vol. 4(2), pages 200-223, April.
  7. Diaz, Antonia & Pijoan-Mas, Josep & Rios-Rull, Jose-Victor, 2003. "Precautionary savings and wealth distribution under habit formation preferences," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1257-1291, September.
  8. De La Croix, D. & Michel, P., 1997. "Optimal Growth when Tastes are Inherited," ASSET - Instituto De Economia Publica 168, ASSET (Association of Southern European Economic Theorists).
  9. Andrew B. Abel, 1985. "Capital Accumulation and Uncertain Lifetimes with Adverse Selection," NBER Working Papers 1664, National Bureau of Economic Research, Inc.
  10. Christopher D. Carroll & Jody Overland & David N. Weil, 1995. "Saving and growth with habit formation," Finance and Economics Discussion Series 95-42, Board of Governors of the Federal Reserve System (U.S.).
  11. Donald Cox & Serena Ng & Andreas Waldkirch, 2000. "Intergenerational Linkages in Consumption Behavior," Econometric Society World Congress 2000 Contributed Papers 1791, Econometric Society, revised 08 Nov 2000.
  12. Jaime Alonso-Carrera & Jordi Caballé & Xavier Raurich, 2004. "Consumption Externalities, Habit Formation and Equilibrium Efficiency," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(2), pages 231-251, 06.
  13. Jordi Caballé & Luisa Fuster, 2003. "Pay-as-you-go Social Security and the Distribution of Altruistic Transfers," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 541-567.
  14. Davies, James B, 1986. "Does Redistribution Reduce Inequality?," Journal of Labor Economics, University of Chicago Press, vol. 4(4), pages 538-59, October.
  15. Becker, Gary S & Tomes, Nigel, 1979. "An Equilibrium Theory of the Distribution of Income and Intergenerational Mobility," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1153-89, December.
  16. de la Croix, David, 2001. "Growth dynamics and education spending: The role of inherited tastes and abilities," European Economic Review, Elsevier, vol. 45(8), pages 1415-1438, August.
  17. Christopher D Carroll & Jody Overland & David N Weil, 1997. "Comparison Utility in a Growth Model," Economics Working Paper Archive 387, The Johns Hopkins University,Department of Economics.
  18. Abel, Andrew B, 1985. "Precautionary Saving and Accidental Bequests," American Economic Review, American Economic Association, vol. 75(4), pages 777-91, September.
  19. de la Croix, David, 1996. "The Dynamics of Bequeathed Tastes," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1996004, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  20. Andrew B. Abel, 1998. "Risk Premia and Term Premia in General Equilibrium," NBER Working Papers 6683, National Bureau of Economic Research, Inc.
  21. Jellal, Mohamed & wolff, François charles, 2002. "Altruistic bequests with inherited tastes," MPRA Paper 38447, University Library of Munich, Germany.
  22. repec:adr:anecst:y:2001:i:63-64:p:12 is not listed on IDEAS
  23. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  24. Jordi Caballé & Luisa Fuster, 2000. "Pay-as-you-go social security and the distribution of bequests," Economics Working Papers 468, Department of Economics and Business, Universitat Pompeu Fabra.
  25. Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 90(3), pages 356-366, June.
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