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US Inequality: Debt Constraints or Incomplete Asset Markets?

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  • Cordoba, Juan Carlos

Abstract

To examine the role of debt constraints and incomplete asset markets (lack of insurance markets) in explaining U.S. inequality, we run horse races between competing models. For a widely used model, we decompose inequality into its fundamental driving forces. The underlying source of inequality in all models is uninsurable idiosyncratic risk. Both debt constraints and incomplete asset markets are needed to account for inequality, but asset market incompleteness is the key friction. It better accounts for the concentration and dispersion of wealth, and is the most costly friction in terms of welfare. Tight debt constraints are important for explaining the lower tail of the wealth distribution.
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Suggested Citation

  • Cordoba, Juan Carlos, 2010. "US Inequality: Debt Constraints or Incomplete Asset Markets?," Staff General Research Papers Archive 32120, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:32120
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    Cited by:

    1. Christian A. Stoltenberg & Vadym Lepetyuk, 2012. "Reconciling consumption inequality with income inequality," Working Papers. Serie AD 2012-19, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    2. Ábrahám, Árpád & Cárceles-Poveda, Eva, 2010. "Endogenous trading constraints with incomplete asset markets," Journal of Economic Theory, Elsevier, vol. 145(3), pages 974-1004, May.
    3. Tom Krebs & Moritz Kuhn & Mark L. J. Wright, 2015. "Human Capital Risk, Contract Enforcement, and the Macroeconomy," American Economic Review, American Economic Association, vol. 105(11), pages 3223-3272, November.
    4. Tobias Broer, 2013. "The Wrong Shape of Insurance? What Cross-Sectional Distributions Tell Us about Models of Consumption Smoothing," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(4), pages 107-140, October.
    5. Frank A. Cowell & Philippe Kerm, 2015. "Wealth Inequality: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 671-710, September.
    6. Xavier Mateos-Planas & Giulio Seccia, 2013. "Consumer Default with Complete Markets: Default-based Pricing and Finite Punishment," Working Papers 711, Queen Mary University of London, School of Economics and Finance.
    7. Vadym Lepetyuk & Christian A. Stoltenberg, 2013. "Reconciling Consumption Inequality with Income Inequality," Tinbergen Institute Discussion Papers 13-124/VI, Tinbergen Institute.
    8. Athreya, Kartik B., 2014. "Big Ideas in Macroeconomics: A Nontechnical View," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262019736.
    9. Sofía Bauducco & Gonzalo Castex, 2013. "The Wealth Distribution in Developing Economies: Comparing the United States to Chile," Working Papers Central Bank of Chile 702, Central Bank of Chile.
    10. Feigenbaum, James, 2011. "Precautionary saving or denied dissaving," Economic Modelling, Elsevier, vol. 28(4), pages 1559-1572, July.
    11. Xavier Mateos-Planas & Giulio Seccia, 2014. "Consumer default with complete markets: default-based pricing and finite punishment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 56(3), pages 549-583, August.
    12. Tobias Broer, 2009. "Stationary equilibrium distributions in economies with limited commitment," Economics Working Papers ECO2009/39, European University Institute.

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