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Digitalization, Entrepreneurship, and Wealth Inequality

Ichiro Muto, Fumitaka Nakamura and Makoto Nirei
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Fumitaka Nakamura: Director, Institute for Monetary and Economic Studies, Bank of Japan (currently, International Monetary Fund, E-mail: fumitaka.nakamura@boj.or.jp)

No 24-E-01, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: What are the main drivers of the recent increase in wealth concentration in the U.S.? This paper quantifies the role played by digitalization using a tractable model with heterogeneous agents with risk aversion. The model combines (1) digital capital that substitutes for labor in the production process and (2) households' investments in risky digital assets to replicate the asset growth of the wealthy since the 1990s. In the equilibrium, a small number of prosperous households with low risk aversion, i.e., digital entrepreneurs, hold most of the risky digital capital, whereas a large number of risk-averse households rely mainly on labor income. Hence, when digitalization advances, these risk-tolerant households enjoy higher returns from digital capital, further accumulating digital capital disproportionately. Based on the model calibrated to the U.S. economy, we show that digitalization (an increase in digital productivity by 21-43 percent) has contributed to more than about 50 percent of the increase in the share of wealth of the top 1 percent of households and more than about 80 percent of that of the top 0.1 percent of households observed over the last 30 years. Moreover, it explains about 20-40 percent increase in the annual savings of the top 1 percent of households. Finally, the comparative statics on the macroeconomic variables show that while advances in digitalization decrease the labor share by 3-5 percentage points, which is in line with the empirical literature, it also increases wages, meaning that risk- averse households, who rely mainly on labor earnings, also gain some benefits from digitalization.

Keywords: Digitalization; Entrepreneurship; Wealth inequality; Savings inequality (search for similar items in EconPapers)
JEL-codes: E21 E22 E24 E25 (search for similar items in EconPapers)
Date: 2024-03
New Economics Papers: this item is included in nep-dge, nep-ent, nep-fdg, nep-ict and nep-upt
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