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Time Preference and the Distributions of Wealth and Income

  • Suen, Richard M. H.

This paper presents a dynamic competitive equilibrium model in which heterogeneity in time preferences alone can generate the observed patterns of wealth and income inequality in the United States. This model generalizes the standard deterministic neoclassical growth model by introducing (i) a direct preference for wealth by the consumers and (ii) human capital formation. The first feature prevents the wealth distribution from collapsing into a degenerate distribution. The second feature generates a strong positive correlation between earnings and wealth across agents. A calibrated version of this model is able to replicate the wealth and income distributions of the United States.

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File URL: http://mpra.ub.uni-muenchen.de/39886/3/MPRA_paper_39886.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26021.

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Date of creation: Sep 2010
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Handle: RePEc:pra:mprapa:26021
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