Habit formation: implications for the wealth distribution
Josep Pijoan-Mas and
José Víctor Ríos Rull
Authors registered in the RePEc Author Service: José-Víctor Ríos-Rull and
Antonia Díaz
UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de EconomÃa
Abstract:
In this paper we study the role of habit formation in shaping the wealth distribution in an otherwise standard heterogeneous agents model economy with idiosyncratic uncertainty. We compare the inplications for precautionary savings and for wealth concentration between economies that only differ in the role played by habit formation. Once preferences are properly adjusted so that the Intertemporal Elasticity of Substituion is the same in all model economies studied, we find that habit formation brings a hefty increase in precautionary savings and very mild reductions in the coefficient of variation and in the Gini index of wealth. We also find that the reductions in these measures of inequality also hold when we adjust our economy so that aggregate savings are the same as in the economy without habit formation. These findings hold for both persistent and non persistent habits although for the former the quantitative size of the effects is much larger. We conclude that habit formation, while being a mechanism that increases the amount of precautionary savings generated in a model, does not change the implications for wealth inequality that arise from standard models.
Date: 2001-12
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Journal Article: Precautionary savings and wealth distribution under habit formation preferences (2003) ![Downloads](/downloads_econpapers.gif)
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Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:we015114
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