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The wealth distribution with durable goods

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  • Luengo Prado, María José
  • Díaz Rodríguez, Antonia

Abstract

This paper studies the effect that illiquid assets and collateral credit frictions have on the level of wealth inequality in a standard model of ex-ante heterogenous agents with idiosyncratic uncertainty. We calibrate our model so that its steady state statistics match selected aggregate statistics of the U.S. economy and data on the earnings distribution. We find that adding illiquid assets and collateral credit frictions decreases wealth inequality decreases slightly relative to an economy with liquid assets and no credit frictions. The effect is small because these frictions mostly affect poor households that account for a small fraction of aggregate wealth. Nevertheless, our richer model allows us to study other dimensions of wealth inequality. In particular, our model replicates the fact that financial assets are more concentrated than total wealth, while residential assets are less concentrated. Furthermore, we document that, in the U.S., the earnings and housing distributions are remarkably similar. Our model can account for this fact so long as the earnings process is fairly persistent

Suggested Citation

  • Luengo Prado, María José & Díaz Rodríguez, Antonia, 2006. "The wealth distribution with durable goods," UC3M Working papers. Economics we067027, Universidad Carlos III de Madrid. Departamento de Economía.
  • Handle: RePEc:cte:werepe:we067027
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