Risk Aversion Heterogeneity, Risky Jobs and Wealth Inequality

This paper considers the macroeconomic implications of a se t of empirical studies finding a high degree of dispersion in preference heterogeneity. It develops a model with risk aversion heterogeneity, uninsurable idiosyncratic income risk, and self-selection into risky jobs to quantify their effects on wealth inequality. The results show that, when estimating the risk aversion distribution with the appropriate PSID data on income lotteries, the model can match the observed degree of wealth inequality in the U.S., accounting for the wealth Gini index in several cases. The model replicates well many features of the wealth distribution, such as its quintiles. However, the share of wealth held by the top 1% is still substantially lower than in the data. Quantitatively, with fairly persistent income processes, the variance of the income shocks greatly matters in generating enough wealth inequality. It is also shown that models without risk aversion heterogeneity underestimate the size of precautionary savings by up to 14 percentage points, and that they account for up to a 55% increase of the complete markets capital stock.