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US Inequality: Debt Constraints or Incomplete Asset Markets?

  • Cordoba, Juan Carlos

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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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 32120.

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Date of creation: 16 Nov 2010
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Publication status: Published in Journal of Monetary Economics, March 2008, vol. 55 no. 2, pp. 350-364
Handle: RePEc:isu:genres:32120
Contact details of provider: Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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