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Relative capital accumulation with heterogeneous individuals

  • Laura Marsiliani

    (Durham Business School)

  • Thomas I. Renstroem

    (Durham Business School)

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    The purpose of this paper is to show how differences in individuals’ labour productivities cause differences in their accumulation of capital, and thereby analysing the evolution of the income distribution. There are three cases of interest: (i) the high productive accumulate relatively more capital [growing inequality], (ii) no individual accumulates relatively more capital [neutrality], (iii) the low productive accumulate relatively more [diminishing inequality]. Which of these cases is generated depends on the price dynamics (the growth rate of wages and the level of the interest rate relative to the rate of time preference), together with the preferences for consumption. The exact conditions for the price dynamics to generate (i), (ii) and (iii) are derived. Furthermore, since the price dynamics is endogenous in general equilibrium, we find the conditions for preferences and technology that determine relative capital accumulation. We find (in general equilibrium) that growing economies typically cause the high productive to accumulate more capital than the low productive if preferences are Decreasing Absolute Risk Aversion, and shrinking economies cause the less productive to accumulate more (i.e. decumulate less). The relations are reversed for Constant and Increasing Relative Risk Aversion. The final part of the paper analyses the effects of capital taxation on the income distribution.

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    Paper provided by Durham University Business School in its series Working Papers with number 2009_06.

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    Date of creation: 01 Dec 2009
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    Handle: RePEc:dur:durham:2009_06
    Contact details of provider: Postal: Durham University Business School, Mill Hill Lane, Durham DH1 3LB, England
    Phone: +44 (0)191 334 5200
    Fax: +44 (0)191 334 5201
    Web page: http://www.dur.ac.uk/business
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    1. Pollak, Robert A, 1971. "Additive Utility Functions and Linear Engel Curves," Review of Economic Studies, Wiley Blackwell, vol. 38(116), pages 401-14, October.
    2. Joseph E. Stiglitz, 1967. "Distribution of Income and Wealth Among Individuals," Cowles Foundation Discussion Papers 238, Cowles Foundation for Research in Economics, Yale University.
    3. Stiglitz, Joseph E, 1978. "Notes on Estate Taxes, Redistribution, and the Concept of Balanced Growth Path Incidence," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S137-50, April.
    4. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    5. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
    6. Chatterjee, Satyajit, 1994. "Transitional dynamics and the distribution of wealth in a neoclassical growth model," Journal of Public Economics, Elsevier, vol. 54(1), pages 97-119, May.
    7. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
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