Capital Management and Wealth Inequality

James Best () and Keshav Dogra
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James Best: https://scholars.cmu.edu/7995-james-best

No 1072, Staff Reports from Federal Reserve Bank of New York

Abstract: Wealthier individuals have stronger incentives to seek higher returns. We investigate theoretically the effect this has on long-run wealth inequality. Incorporating capital management into a standard Ramsey-Cass-Koopmans model generates substantial long-run inequality: the majority of the population works and holds no capital, while a small minority holds a large amount of capital and manages it full-time. Counterintuitively, financial innovations or policies that reduce return differentials increase long-run wealth inequality. Egalitarian steady states may exist, but are inefficient and unstable: a small concentration in capital ownership causes a transition to an unequal steady state. Capital management introduces a novel equity-efficiency tradeoff: scale economies make it efficient for a few individuals to manage capital full-time, but under laissez-faire this generates substantial inequality. A utilitarian planner would instead instruct a few individuals to manage capital on behalf of society and transfer most of their income to the workers.

Keywords: wealth inequality; capital; returns; management; information; Financial innovation (search for similar items in EconPapers)
JEL-codes: D31 D83 E21 E22 G51 (search for similar items in EconPapers)
Pages: 46
Date: 2023-09-01
New Economics Papers: this item is included in nep-dge and nep-fdg
Note: Revised January 2024.
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DOI: 10.59576/sr.1072

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