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Income Inequality and Asset Prices


  • Agnieszka Markiewicz

    (Erasmus University Rotterdam)


We study the relationship between income inequality and stock market returns. We develop a quantitative general equilibrium model that includes two groups of agents: top 10% income group (capital owners) and workers who consume their after-tax labor income. Inequality in the model arises from two sources: capital and labor, and its increase is modeled as growth in the capital owners' capital and labor shares of income. The model and the data predict positive relationship between capital income inequality and real equity returns and negative relationship between labor income inequality and real equity returns. We find that real cumulative return on ex-dividend S&P 500 index would have been lower by 40% if there was no rise in capital income inequality. If the labor share of top decile would not grow, the same S&P 500 index would have experienced cumulative growth higher by 32%. The effects of capital and labor incomes' changes partially offset each other, and S&P 500 index displays a cumulative increase of 290% between 1970 and 2014 and 275% if there was no increase in income inequality.

Suggested Citation

  • Agnieszka Markiewicz, 2017. "Income Inequality and Asset Prices," 2017 Meeting Papers 1016, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1016

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    1. Boon or Boondoggle? The Long Run Economics of the Empire State Building
      by Jason Barr in Skynomics Blog on 2020-08-17 12:28:49

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