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Heterogeneous Time-Preference and the Distribution of Wealth

Listed author(s):
  • David Andolfatto

    (Simon Fraser University)

  • James Redekop

    (The University of Waterloo)

This paper analyzes a dynamic model in which physical capital can be accumulated or depleted, and labour supply is endogenous. The distribution of income is then endogenously determined by both technological parameters of production, and the distribution of agents' discount parameters. Degenerate wealth distributions, in which only the most patient agents have any wealth, are avoided by having a fraction of the agents die each period, and bequeath their wealth to descendants with independently random discount parameters. On average, more patient agents will have higher wealths and incomes, but in the short run agents' stocks of wealth depend on their inherited wealth. If a patient individual lives long enough, she will retire and live on only investment income, while if an impatient individual lives long enough, he will deplete all his wealth and live on only labour earnings. The effects of a general increase in patience are an increase in the wage rate, a lowering of the return on capital, and general increases in wealth, income, and utility. Possibilities for engineering such an increase, by promoting 'artificial patience', could include favourable taxation of investment income, forced savings such as payroll-tax financed pension plans, or public subsidies for education and health.

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Paper provided by EconWPA in its series Macroeconomics with number 0310004.

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Length: 29 pages
Date of creation: 06 Oct 2003
Handle: RePEc:wpa:wuwpma:0310004
Note: Type of Document - Tex/; prepared on IBM PC; to print on Lexmark Optra E310; pages: 29
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  1. Benveniste, L M & Scheinkman, J A, 1979. "On the Differentiability of the Value Function in Dynamic Models of Economics," Econometrica, Econometric Society, vol. 47(3), pages 727-732, May.
  2. Lucas, Robert Jr. & Stokey, Nancy L., 1984. "Optimal growth with many consumers," Journal of Economic Theory, Elsevier, vol. 32(1), pages 139-171, February.
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