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Time Preference and the Distribution of Wealth and Income

  • Richard M. H. Suen

    (University of Connecticut)

This paper analyzes the connection between time preference heterogeneity and economic inequality. To achieve this, we extend the standard neoclassical growth model by introducing three additional features, namely (i) heterogeneity in consumers’ discount rates, (ii) direct preferences for wealth, and (iii) human capital formation. The second feature prevents the wealth distribution from collapsing into a degenerate distribution. The third feature generates a strong positive correlation between earnings and capital income across consumers. A calibrated version of the model is able to generate patterns of wealth and income inequality that are very similar to those observed in the United States.

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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2012-01.

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Length: 36 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:uct:uconnp:2012-01
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