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Big fortunes, aggregate saving and growth

  • Michael Reiter

The paper analyzes a heterogeneous agents macro model in which large fortunes are created through entrepreneurial behavior. Special attention is given to the saving behavior of the very wealthy families. It is a prominent puzzle in consumption theory that the very rich save more than what one can explain by the standard permanent-income/life-cycle model. The paper follows the proposal of Christopher Carroll (1998) and modifies the utility function such that households may derive utility not just from consumption, but also from the ownership of capital directly. Carroll has shown that this modification is able to explain the saving behavior of the rich in a partial equilibrium setup. The present paper puts this idea into general equilibrium with a continuum of agents, and calibrates it to US data. It analyzes numerically under what conditions this model can explain the broad facts about wealth distribution, saving and interest rates. The paper also analyzes how savings and the interest rates react to low-frequency changes in productivity growth and capital tax rates, and compares it with the predictions of the standard model.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 263.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:263
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