Income Inequality and Asset Prices under Redistributive Taxation

Lubos Pastor and Pietro Veronesi

No 21668, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Our simple model features agents heterogeneous in skill and risk aversion, incomplete financial markets, and redistributive taxation. In equilibrium, agents become entrepreneurs if their skill is sufficiently high or risk aversion sufficiently low. Under heavier taxation, entrepreneurs are more skilled and less risk-averse, on average. Through these selection effects, the tax rate is positively related to aggregate productivity and negatively related to the equity risk premium. Both income inequality and stock prices initially increase but eventually decrease with the tax rate. Investment risk, stock market participation, and skill heterogeneity all contribute to inequality. Cross-country empirical evidence supports the model’s predictions.

JEL-codes: E24 G1 H2 J24 J31 J38 (search for similar items in EconPapers)
Date: 2015-10
New Economics Papers: this item is included in nep-dge, nep-ent, nep-ifn, nep-mac and nep-pbe
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Published as Pástor, Lˇuboš & Veronesi, Pietro, 2016. "Income inequality and asset prices under redistributive taxation," Journal of Monetary Economics, Elsevier, vol. 81(C), pages 1-20.

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Related works:
Journal Article: Income inequality and asset prices under redistributive taxation (2016)
Working Paper: Income Inequality and Asset Prices under Redistributive Taxation (2015)
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