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How Important is Discount Rate Heterogeneity for Wealth Inequality?

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  • Lutz Hendricks

Abstract

This paper investigates the role of discount rate heterogeneity for wealth inequality. The key idea is to infer the distribution of preference parameters from the observed age profile of wealth inequality. The contribution of preference heterogeneity to wealth inequality can then be measured using a quantitative life-cycle model. I find that discount rate heterogeneity increases the Gini coefficient of wealth by 0.06 to 0.11. The share of wealth held by the richest 1% of households rises by 0.03 to 0.13. The larger changes occur when altruistic bequests are large and when preferences are strongly persistent across generations. Discount rate heterogeneity also helps account for the large wealth inequality observed among households with similar lifetime earnings.

Suggested Citation

  • Lutz Hendricks, 2005. "How Important is Discount Rate Heterogeneity for Wealth Inequality?," CESifo Working Paper Series 1604, CESifo.
    • Handle: RePEc:ces:ceswps:_1604
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    More about this item

    Keywords

    wealth inequality; preference heterogeneity;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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