Returns Heterogeneity and Consumption Inequality Over the Life Cycle

Claudio Daminato and Luigi Pistaferri

No 19093, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: A recent literature argues that persistent heterogeneity in wealth returns ("type dependence") as well as a positive association with wealth levels ("scale dependence") play an important role for explaining features of the wealth distribution, especially its extreme concentration at the top. In contrast, traditional models of wealth accumulation emphasize the role of persistent differences in labor earnings. Using panel data from the PSID, we first document that a common unobserved component (which we interpret as the endowment of cognitive and non-cognitive skills of an individual) drives persistent heterogeneity in both wealth returns and labor earnings. We embed these features of the joint wealth return-earnings process in a life-cycle model of consumer behavior and show that ignoring them would dramatically understate average returns for people at the top of the wealth distribution as well as the level and rise of consumption inequality over the life cycle.

JEL-codes: E21 G51 J24 (search for similar items in EconPapers)
Date: 2024-05
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